It’s going to happen.
The move is going to be big, it’s probably going to happen very quickly, and it should get going soon.
But in which direction?
Ahh yes – that is the question!
Let’s take a look at the Copper ETF $JJC. I want to apologize first for this kaleidoscope looking chart. I can’t stand charts like this with too much going on. But I’m going to try my best to make some sense of all these lines shapes and colors. Bear with me:
Alright, so the first thing we want to look at is my favorite ‘keep it simple stupid’ support/resistance connection. As we mentioned a month ago (Feb 27th – Dr. Copper Up Against Key Resistance), the important support levels from last May and again in August (green arrows) broke down in September. This critical breakdown via Gap lower turned into resistance in early February. The fact that this exact level is also the 61.8% Fibonacci Retracement from the 30% plus August-October decline makes this resistance all that more important.
Now, since this resistance was first tested about 6 weeks ago, Copper has been consolidating in a symmetrical triangle looking formation which is very typical of a security resting before continuing its current trend. In this case, this is a monster uptrend off the October lows. The presumption here is that the correction resolves itself in the direction of the trend and retests last summers highs up around $59.00.
As far as the moving averages go, we have a 50 (blue) and a 200 day (red) coming together with ‘golden cross’ type of behavior. The truth is that I don’t really care if the cross is golden or fuchsia (see my Pay No Attention to Golden Cross and How Bullish is the Golden Cross? via Barry Ritholtz). What I do care about is the security’s potential to trade higher above upward-sloping 50 & 200 day moving averages. This is the sort of behavior that you want to see in an strong uptrend. And if Copper does indeed break out of this triangle, then that is exactly what we’ll have here.
What is the Relative Strength Index (RSI) telling us? Only that it’s been in bullish mode since coming off that Bullish Divergence in early October (Orange line & circle). The overbought RSI conditions in late January and recent support found around 45 confirms just that. Chalk this one up as another positive.
And finally the correlations. Some traders refuse to look at the ETFs and focus only on the futures. That’s fine. But as we can see in this chart, the ETF $JJC and Copper futures have a 0.99 correlation. To me, that means they do the same thing. Use whichever vehicle you want because the charts are identical.
When we have a series of lower highs above a series of higher lows we know for a fact that this cannot last forever. In a symmetrical triangle, by definition, one side needs to eventually win. There are no ties here like hockey or old school NFL. Think of it as a playoff game where they’ll keep battling it out until one team comes out victorious.
I’m going with the trend here so I’m on the side of the bulls. But two technicians can look at the same thing and come up with different conclusions. For example, I have a ton of respect for technician Peter L. Brandt, and he sees things differently here. And he’s been doing this a lot longer than I have. It’s all good. This is an art, not an exact science.
So let me bottom line it: We can be conservative with this one if that’s your game. You want to wait for confirmation? Fine, wait ’til we break out of the upper downtrend line resistance. Want to be ultra-conservative? Fine, wait ’til we take out February’s highs which is also the 61.8% Fibonacci retracement. Don’t want to trade it at all? Fine watch for a breakout or breakdown as a tell for equities as an asset class. We love copper as a leading indicator. Don’t want to watch Copper at all? That’s OK too 😉
But the point is that I think this consolidation is the real deal. I would expect a monster move in the direction of the breakout/breakdown. After a correction of this nature takes this long to resolve, the resolution is typically vicious.
Copper, Stopper, Build a Topper (PeterLBrandt)
What Can We Learn From the CRB Index? (Allstarcharts March 12, 2012)
Dr. Copper Up Against Key Resistance (Allstarcharts February 27, 2012)
Tags: $HG_F $JJC $QC_F $FCX