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REVERSAL


Copper Tops

02/28/03 11:53:46 AM
by David Penn

A 1-2-3 trend reversal leads to a 2B test of top for copper futures.

Security:   HGH03
Position:   N/A

I've been a big fan of Victor Sperandeo's 1-2-3 trend reversal and 2B test of top/bottom strategies (see his Methods of a Wall Street Master and/or Principles of Professional Speculation). While these strategies are only part of Sperandeo's trading toolbox, they remain at the core of what he suggests are his "fundamental technical measures." Having seen both the 1-2-3 trend reversal and 2B test of top/bottom in action, I can see why. Both strategies are based on some of the most basic concepts of technical analysis: trendline breaks, support and resistance, and the importance of follow-through on breakouts, whether they are to the upside or the downside.

The year-to-date price action in copper futures provides us with an opportunity to see how both the 1-2-3 trend reversal and the 2B test of top work. Basis March, copper futures began 2003 in rally mode, climbing from a low of 0.6940 on December 31st to a high of 0.7950 on February 3rd. Copper began to correct going into February, crossing below a significant 25-day up trendline on February 6th. This initial trendline break represents the "1" in the 1-2-3 trend reversal methodology. The "2" comes when prices attempt to resume the old trend--in this case upward--and establish a new high. While this attempt took place three days later, it took a fourth day before the attempt could be labeled a failure. On the third day prices opened up, made an intraday attempt to climb back about the 25-day up trendline, but ended the day near the bottom of the daily range. When prices remained lower on the following day, the probability of a trend reversal increased greatly.

A 1-2-3 trend reversal and a 2B test of top (inside rectangle) highlight two selling opportunities for March copper.
Graphic provided by: TradeStation.
 
The "3" in the 1-2-3 trend reversal strategy arrives when prices break down below the low of the initial trendline break. In the case of March copper, this low was at 0.7630. Interestingly enough, prices gapped down beneath 0.7630 on the "3" day (February 13th), opening at 0.7580 and ending the day at 0.7500. Copper moved down for two additional days, reaching a low of 0.7390 on February 18th before reversing sharply and rallying back to test the previous highs established earlier in the month.

This test of the previous high is what has set up the 2B test that March copper just experienced. At first, March copper appeared to have successfully tested the highs of February 3rd, with a close of 0.7960 on February 26th. However, the 2B test of top strategy demands that prices show follow-through immediately after making a higher high. If prices instead reverse and close beneath the previous high, then the odds are great that the new highs will not hold and a trend reversal is at hand. Looking at the chart of March copper, it is clear that there was not follow-through on the new highs of February 26th.

In fact, the following day was an inside reversal day--a day that, when occurring in the right place, in and of itself suggests reversal of the current trend. The confluence of factors--the failed 2B test and the inside reversal day--provided powerful technical evidence for a trend reversal. The day following the inside reversal day (or, the day that confirmed the lack of follow-through on the new high) was a major down day as copper opened at 0.7855 near the top of its range and was last trading at 0.7730.



David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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Date: 03/04/03Rank: 5Comment: 
Date: 03/04/03Rank: 5Comment: 
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