The Futures / Inter Market Report

 Trading the World's Markets

 November 23, 2007 

Matthew Caruso, CMT

If you have any questions, send them to:

e-mail: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

Copper approaching bottom 

            Back on October 26^th of this year I put out a report calling for a top in copper and impending fall. Selling short 1 contract that following Monday would have led to $17,000 gain per contract at the recent low of this past week. Not bad for 1 month’s trading. It seems however that the fall that started early October may be coming to an end soon, and the start of a rally in copper may soon begin. 

            There are several characteristics common with market bottoms. They include investor pessimism, high volatility and downward price momentum.  It is hard to find any bottoms of importance that do not have these factors associated with them. When looking at copper prices, all of these factors are present. Taking a look at figure 1, there are 2 indicators at the bottom of the chart, Larry Williams’ Sentiment and Vix indicators. To learn more on these indicators please refer to Larry’s courses and books along with the latest issue of Active Trader. The sentiment indicator is a typical sentiment reading in that it polls a certain number of advisors each week in order to get an idea of investor sentiment. The Vix indicator is revolutionary; it is an indicator that moves similarly to the Volatility index of the S&P 500. However given that it is a synthetic proxy it can be used on any security on any time frame. Therefore volatility spikes seen in the Vix indicator is typical of market bottoms. 

            As can be seen in figure 1 sentiment in copper is now at a reading of 15 which is pessimistic. The lack of bullishness is in itself a bullish indication. A quick glance will reveal how this typically occurs at bottoms. As well vix is at one of the highest reading seen in copper for years. Clearly we are over extended to the downside based on these indicators. 

Figure 1 chart by genesisft.com 

            Any study of a security should always consider the element of time. By this I am referring to studying any cycles occurring in price. Copper has a consistent 14 week cycle and the best way to view this is by studying a 7 week momentum oscillator. Figure 2 shows weekly prices with a 7 week oscillator. As you can see oversold reading are typical of a market bottom. All of the past oversold readings have been highlighted with a vertical dashed line. We’re currently oversold and a bottom is likely to occur soon. As well we are on support as shown by the descending support line drawn on price in figure 2.

Figure 2 chart by Metastock 

            The last factor left to consider is the most important; trend. Fighting a trend will lead to losses, if not immediately then in the long run. Some skillful market players will be good at counter trend trading, but it is my view that trading with the trend is your best bet. When looking at daily prices of copper in figure 3, it is clear that the trend is currently down. Despite all the reasons given up to this point that a bottom is likely to occur in copper, without a trend reversal it is difficult to buy copper with a reasonable amount of risk. From the July top there were 18 days to the downside. An investor would have a 1 in 18 chance in picking the bottom in copper. These are not the odds we are looking for. Waiting for a break above a trendline or higher low is a much safer way to invest. Therefore, despite the bullish factors in this market, a trend reversal to some extent is needed before an investor can in my opinion have a low risk trade with a  high chance of success. 

Figure 3 chart by Metatsock               

-------------------------------------------------------------------------------------------------------------------------------

Disclaimer

TradeSystemGuru.com obtains information from sources deemed to be reliable;
however, TradeSystemGuru.com does not guarantee the accuracy of any of the
information provided. TradeSystemGuru.com makes no warranties, expressed
or implied, as to the fitness of the information for any purpose, or to results
obtained by individuals using the information. We may or may not be invested
in any investments cited above.

In no event shall TradeSystemGuru.com. be liable for direct, indirect, or incidental
damages resulting from the use of the information found on or distributed through
this website. TradeSystemGuru.com shall be indemnified and held harmless from
any actions, claims, proceedings, or liabilities with respect to the information
and its use. TradeSystemGuru.com does not make specific trading recommendations
or provide individualized market advice. All information provided is only to be
construed as opinions and to be used as an information service only. We encourage
investors to contact a registered securities representative prior to making any
investment or related decisions.