Greed is one of the strongest human motivators. It is easy to get greedy, but it is hard to push it down after it gets extreme. The main point of my previous update in August was to focus your attention on the price action in the $3 area as the price could hit this psychological level and then retreat. My advice was to book profits and wait to see what would happen next.
I hope that you heeded my advice and didn’t get greedy as copper was pushed down below the $3 level very quickly.
In the same post, I thought that this upside move in the metal that had started last year could just be a consolidation before another drop down. In the chart below I go into more details about it.
Chart 1. Copper Monthly
Chart courtesy of tradingview.com
The historical levels offer touching points for the trends and strongly influence both the current and the future price movements. I highlighted two touching points in 2011 with the orange circles, which built an upside resistance of the black downtrend. The downside of this trend is shaped through the troughs of 2011 and 2016.
This downtrend contours the long-lasting correction that started in 2011. It retraces the upside move, which took place at the end of 2008 and the beginning of 2011 (26 months). I explained to you before that corrective moves are tricky and time-consuming price actions, which already spent more than six years vs. two years of the other move up on the copper chart. And it could last until the price breaks above the resistance.
It’s hard to predict tops and lows as they are a culmination of traders’ emotions, which is a subject of modern and future psychological research. That’s why it is too early to tag the current top that’s been established this month at the $3.18 mark as a reversal point. Though, we still have room to the upside of the trend around the $3.32 mark.
We never know for sure about the reversal until the price is making a confirmative breach of the trendlines. I put such a line (blue) beneath the current upside move to highlight the confirmation area for you. As you can see in the history on the left, the gray support line accurately signaled a reversal in September 2011 when the price breached below it.
To strengthen today’s analysis, I also added the MACD histogram sub-chart, which shows the difference between the fast MACD line and the signal line. The main thing is the behavior of the indicator (growth/fall) and its position on the sub-chart (above or below zero). The combination of tops and bottoms on the chart correlates with peaks and troughs on the MACD histogram.
The miscorrelation offers divergence signals and one such signal we currently have on the chart. The higher high on the chart wasn’t confirmed on the orange histogram below, creating a bearish divergence.
We had such a situation in 2011 when the MACD didn’t confirm the new major top in copper. After the histogram dropped to the zero and crossed below it, the huge drop in the metal price reversed the market. It was a double signal – the same time the price breached below the gray confirmation trendline. Watch both blue trendline support and the histogram to get the corresponding signal this time as divergence has already been detected.
The price could hit the previous major low at the 1.25 mark, which acts as a double support ( the downside of the trend + previous low). It could be a mega drop. The risk should be limited above the $3.32 mark beyond the resistance line. The current Risk/Reward ratio exceeds 4.
The trend of the copper price reflects the health of the global economy as I showed you in my earlier posts and the possible huge drop of the metal would indicate a fragility of the world economy. On the other hand, it just could be a harbinger of the new economic paradigm with lower consumption at the whole and the metal in particular. There also could be a change of materials used in construction and electronics as a scientific progress is always underway. Let us be optimistic but cautious traders.
Intelligent trades!
Aibek Burabayev
INO.com Contributor, Metals
Disclosure: This contributor has no positions in any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
do you see an up side for copper in the storm rebuilding areas need for copper?
Sorry, didn't read the article (nothing personal, chronic insomnia has just left me with a very short attention span), but I think the price of copper is VERY overinflated along with everything else about these financial markets today (with the possible exception of gold, the price of which is notorious for being suppressed by central banks). If "Dr. Copper" started seriously losing weight, I would take that as a sign that the party is over for these central-bank-bonanza-driven financial markets.
If you talk to people that work at wire plants you can get a good idea about what's ahead