CTS Spotlight for the week of August 19th, 2011

Hello and welcome back to CRI's CTS Spotlight,

08/19/11:The tentative bottom in the US Dollar index is coming under pressure. The index matched its June support low of 73.51 only to briefly bounce off it. Economic news coming out of North America is poor at best so a general flight out of that region appears to be happening (as the Cdn. dollar has come under pressure too). The yield curve itself has narrowed dramatically suggesting the odds of a pending 'double dip' recession are growing by the day. As an ultimate leading indicator, equity price action also too points to a contraction in the economy rather than expansion. Lastly, and our focus for this weeks Commodity Trend Spotlight Blog, Copper prices have a well defined top working as well which suggests a weakening economic backdrop.

 

As the above commentary suggests, there are growing signs of a potential recession here in North America. From economic data (the New York and Philly Fed numbers for example) to chart analysis (breakdowns in equity prices) to a flattening yield curve, there is plenty to suggest the expansion from the 2009 lows has indeed come to an end. Couple this economic backdrop with the political rhetoric of late (all about austerity rather than stimulus) and we have the makings for a very serious situation. Governments must step up and take the place of the consumer in times like these, yet it appears the exact opposite is happening. This horrible economic combination was one of the hallmarks of the great depression, are we about to make the very same mistake again?

This weeks CTS Spotlight focus's on Copper. Historically, Copper prices follow the broader economy very closely (hence the nickname, 'Professor of Economics'). Since copper goes into everything from housing to automobiles, a higher trending copper market usually implies strong demand and therefor it implies a strong economy. Conversely, a lower trending copper market implies weak demand and therefore a weak economy. The price chart above is of Copper and you will notice that it had been trending higher through 2009 and 2010 but has rolled over through 2011. Copper prices are indeed correcting and as of last week have confirmed the lower trending market by making a 'lower low'. Having said that, we all know nothing moves in a straight line and there is plenty of evidence to suggest copper prices are going to be extremely volatile over the coming weeks/months.

So what's the trend? The break of the May, 2011 lows (two weeks ago) suggests we are now comfortably within a downward pointing price channel. The top of the channel currently sits near the $4.40 area and the bottom of the channel is near $3.80. One can make a case for prices to move about 10% higher or lower from where we currently are but until the market can put in a double bottom price pattern, this market is still trending lower.

So for an idea of where prices could/ought to move in the coming trading sessions lets take a look at the chart for guidance.

Upside objective: The fact that the market left a gap just above $4.40 suggests that there ought to be a rally of some sort to fill the gap in. Exactly when, no-one knows but the gap is there and we must respect it. 

Downside objective: The '50% rule' suggests prices want to move down into the $3.691 area. $3.58 & $3.70 represent significant trading highs and lows from 2010 and at this point ought to be tested. The speed/resistance line currently sits just under $3.80. 

So in summary then, as a general proxy for our North American economy, copper prices suggest we are contracting rather than expanding. The market has a well established bear price channel in place where resistance is about 10% higher than current market prices and support is about 10% lower. I personally don't think the risk reward ratio is attractive enough to take a position either way but one must respect what the market is telling us. The questions is - are you listening?

That's all for this issue of the CTS Spotlight,

Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.the-rational-investor.com