The Futures / Inter Market Report

Trading the World’s Markets                            

June 20, 2008

                                            
Matthew Caruso, CMT                                  
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Copper to extend rally through June

            Copper has been in a correction since its highs in late April/ early May. This past week however, copper has finally broken out of its downward sloping channel and marched higher as can be seen in figure 2. The long term trend is still up in this market and we will take a look at what we should expect in the near future. 

            There are 3 bullish underlying factors supporting this price advance. Firstly, people became excessively bearish as measured by my sentiment indicator in figure 1. An extreme level of pessimism is typical of bottoms not tops. The second important point is that copper typically rallies through the month of June as can be seen by the seasonal trend in figure 1. The top that came in May was not a very big surprise either. As you can see by the seasonal trend, it has been typical for copper to top in May and this year copper followed the seasonal trend.             If the seasonal trend is any guide, which I think it is, copper should continue to rally through the month of June and given the long-term secular uptrend I anticipate that copper will surprise us on the upside in terms of its advance, rather than on the downside. The last factor I want to look at is commercial traders. Although they are not excessively bullish, they were willing to buy more copper on the dip which means they still have reason to believe prices will climb.

Figure 1 chart by genesisft.com 

            Many traders, including myself, will admit that timing is everything. You can be dead right about where a market will go, but if buy to late or too early, you are dead wrong -especially in the futures market. Looking at figure 2, we have broken out nicely from our downward channel. Buying at the lower end of the channel prior to the breakout in anticipation of it was a low risk trade, and so was buying at the breakout. However, we are currently up six straight days from the low and due for pullback – likely to the top of the channel. That would create a great risk/reward opportunity. All markets climb in a staircase fashion, in any advances there are small pullbacks. Buying an extended market may lead to you jumping out of the trade just when the pullback is ending. A pullback to the channel without an increase in volatility would be a bullish pullback and likely a launching pad for higher prices.

Figure 2 chart by genesisft.com    

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