The Futures / Inter Market Report

Trading the World's Markets

October 26, 2007

Matthew Caruso, CMT

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Top for Copper

The recent rise in the metal markets since their bottom in August has been spectacular. Strength has not been as strong in all of the different metals. Although gold finished this week at $787.50, a multi decade high, copper has already retraced about 50% of its up move from August and has been showing considerable underperformance relative to gold. Looking at the charts, it appears that we have reached a major overhead resistance for copper and a likely top. 

Looking at weekly prices in figure 1, a triple top has formed. Although prices would have to fall below the recent August low to confirm the top, there are some leading indicators showing that the top appears to be in place. The stochastic oscillator in figure 2 measures the momentum of weekly prices. As you can see momentum has now shifted to the downside. The 2 previous momentum sell occurrences at the current resistance line has led to sell offs in copper. However, there is reason to believe that this time the sell off will be larger. 

Figure 1 chart by Metastock 

The reason why the current failure to break through resistance is so important is that momentum on the monthly charts is also showing signs of a top, but on the monthly chart which has greater implications then a sell signal on a weekly chart. The current momentum top in monthly prices can be seen in figure 2. As you can see in that chart, momentum has now topped with prices at a lower level then the last major monthly top. This would be the first lower high on the monthly charts since 2002 and may be the beginning of a large double top spanning over 2 years, although that would only be confirmed if prices fall below the 2007 low. Therefore, this downward pressure on the monthly chart adds more credence to the current top forming on the weekly chart.

At this time I see 2 pivotal areas. For the sake of risk vs. reward we would like to time an entry as best as possible. As you can see in figure 3, the strength in the metal market on Friday created a buy signal in the daily stochastic. Seasonally there is a top in copper prices in November. Therefore if prices retrace between 38 and 61 percent (2 red lines in figure 3) it may create an optimal shorting opportunity. However, if prices fall below the recent October low, the inability for the upturn in momentum to cause a rally will signify the true downward selling pressure and a retracement may not occur. A climb in prices above the October high would negate this analysis.   

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