Hello and welcome back to CRI's CTS Spotlight,
05/06/11: The US Dollar Index has hit its downside objectives and then reversed violently off its lows. This move (and many commodity bearish reversals) has come right into the normal seasonal peak of May and yet again lends credence to the old adage, 'Sell in May and walk away'. Regular readers of CRI's WCTS will recall our overt cautious behavior over the past few weeks in anticipation of such an event. Indeed, the price action has been quite abnormal with Silver, for example, loosing more than $16/oz in just one week. This week's CTS spotlight is on Copper and how its price action is often called the professor of economics. Can you tell which way the Prof is expecting the broader economy to move over the coming weeks/months? You should!
This week I thought we ought to take a look at our old friend High Grade Copper. Because copper itself is used in so many manufactured products throughout our economy (from autos to homes to consumer electronics) this commodity, unlike many others, is often used as a barometer for the broader economy. In fact, it has been given the nickname of Professor of Economics 101. Simply put, whichever way copper prices are trending gives economists a good idea of where the broader economy is expected to move in the near future.
With that said, I think it speaks volumes that copper prices HAD been trending higher for (a rather remarkably) 117 weeks or a little over two years straight. Since the credit crunch of '07-'08 and the subsequent bottom in '09 copper has done nothing but go up. That now appears to be changing. Seasonally, we can understand a natural top ought to come in at this time of year (given that those who plan to build new homes over the summer months have bought all of their needed supplies by now) but added to that is a general sense that the economic expansion that started a little over two years ago seems to be running out of steam.
Specifically, Copper has now put in a very well defined double top price pattern and has subsequently confirmed that top with this past week's breakdown through important support at $4.076/lb. While I am not looking for the proverbial sky to fall, one ought to expect a healthy correction back into the $3.68/lb area as this would represent a 50% correction of the past year's price action. Keep in mind too, this formation is very large (with suggested stops more than $.50 higher than the short entry). Because of this, I doubt there are many traders with deep enough pockets to be able to stomach this kind of risk ($.50 on one contract represents $12,500!). Heck, most of us should be able to remember when copper wouldn't move $.50 in a whole year!
So while it is important to see and understand what is going on in the market, I doubt many will actually do the trade. What is important here is that the run-away bull market is starting to fail. Consider too the fact that the first two weeks study of Q2'11 suggested we were going to have some tough slogging through the quarter.
Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.the-rational-investor.com
