This is one of my favorite measures of risk. If you want to know where risk assets are headed, you have to listen to Dr. Copper. It’s that simple.
Three months ago we put up a post titled, “Are You Ready For This Monster Move In Copper?”. The basic premise behind it was that base metal had been consolidating for several months in a triangle-type formation. After a 30% move in just 4 months, Copper was at the tail-end of a well-deserved break. The correction was defined by a down trendline up above serving as resistance and an upward sloping trendline below acting as support. At that point, the price of Copper was approaching the apex and a break of either of these trendlines would decide the direction of the next big move.
Based on the outcome, we would know a lot about copper as well as the overall risk-on environment. Just guessing at the time, I figured there was a higher likelihood of a break out higher because that was the direction of the short-term trend. Fellow Technician Peter L. Brandt took the side of the bears and as it turned out, he was 100% right. This is why we have to keep an open mind in this market. No egos here.
Since Copper decided to break down, the base metal is down 13% in just 3 months. More importantly, US equities have struggled to stay above water. During this risk-off environment that Dr. Copper was warning us about, the S&P500 has seen a 10% correction and we’re still not out of the woods.
So now what?
Below is a weekly line chart of Copper where we can see that it is currently testing a key trendline. This is the 4th test of support and as we always say, The more times a level is tested, the higher the likelihood that it breaks. And we’re flirting with some dangerous levels here folks. Meanwhile, the relative strength index (RSI) has not shown us any evidence of bullish activity. Quite the opposite, in fact.
On the bright side, Copper has NOT yet broken that trendline, and RSI is trying to hold on to the upper 30s, where we could see the beginning stages of bullish momentum. But we’re not there yet and may be getting ahead of ourselves.
The next chart is a closer look at the Copper ETF $JJC. This is a daily chart showing the consequences of that breakdown below the triangle consolidation. Now that price rolled over, it dragged the moving averages with it. We have declining 50 & 200-day moving averages and therefore have to give the benefit of the doubt to the bears. Copper is now guilty until proven innocent (as alphatrends likes to say). So if we can’t hold on to these lows from former support in November and December, we are likely to revisit the lows from October where this 30% rally mentioned above started in the first place. And that’s not good for stocks in general.
Want to know where risk assets are headed? Listen to Dr. Copper. If we see some positive developments in upcoming weeks we’ll reevaluate what’s going on. But for now, nothing great to speak of and we’re watching some uncomfortable flirtation with dangerous ground.
Tags: $JJC $HG_F $QC_F