Getting Technical
WEDNESDAY, MARCH 12, 2014
Slumping Copper at Risk of Big Drop
By MICHAEL KAHN
Prices are tumbling thanks to bad economic news from China. Unless the metal soon stabilizes, the odds of a rout will rise.
Is the worst over? Perhaps not. And if not, watch out below.
Copper prices were trading benignly last week until Friday when they quickly fell 4.2%. Many were caught off guard by new reports of weak economic data in China. But as chart watchers like to say, surprises happen in the direction of the trend. In this case, that trend is down. And chart patterns suggest there is much more downside ahead.
While copper now trades at levels last seen in July 2010, bulls can argue that the current decline was a knee-jerk reaction to events and an overshoot of technical support on the charts.
Investors can track copper via the iPath Dow Jones UBS Copper Subindex Total Return exchange-traded note (ticker: JJC), but the Comex copper futures present a clearer picture for analysis (see Chart 1).
![[image]](http://barrons.wsj.net/public/resources/images/ON-BD990_GT1031_NS_20140312153817.jpg)
In this chart, copper dipped marginally below a long-term support level that has been in place for several years. On this time scale, the breakdown is not significant; therefore, bulls can say it was a merely due to short-term selling momentum.
Bears can argue that the late-December rally and January decline represented a failed upside breakout. In technical analysis, failed bullish signals usually turn into bearish signals; indeed, the trend has been solidly to the downside since then.
So which case is stronger? Sentiment data indicate there is no evidence that a full-blown panic has set in. According to the Daily Sentiment Index survey of traders compiled by veteran trader Jake Bernstein at Trade-Futures.com, 34% of traders are bullish. Readings below 20% bullish have typically indicated a market where fear dominates and conditions are ripe for a rally to begin.
In other words, sentiment has not tipped so far to the bearish side to give us any signals. And that suggests the bottom is not yet in.
To be sure, major copper mining stocks such as Freeport-McMoRan Copper & Gold (FCX) and Southern Copper (SCCO) have not broken respective support levels (see Chart 2).
![[image]](http://barrons.wsj.net/public/resources/images/ON-BD991_GT2031_NS_20140312153840.jpg)
Moreover, other industrial metals, and many of the companies that mine them, are trading flat to higher over the past few weeks. This includes metals from nickel to lead and stocks from Rio Tinto (RIO) to Alcoa (AA).
While this column does not delve deeply into fundamentals, supplies in the global copper market are tight, according to a recent Commerzbank report sent to its clients.
Could that mean the marginal break of technical support was indeed an overshoot and prices will rebound? It could, but without traders showing extreme bearishness there may not be the fuel needed -- i.e., shorts needing to cover their positions -- to fuel a major rally.
If the current breakdown is real, the downside could be substantial. From its current $2.96 per pound, the breakdown below support and the "triangle" pattern in place since 2011 targets $2.00. And there is no major chart support until the 2008 lows in the 1.50 area -- nearly 50% below current levels.
But let's not get ahead of the market. For now, the trend is down even though conditions are oversold in the short term. It is likely that we will know within a few days if copper is going to hold or fold. And if it does continue lower the downside targets mentioned above seem too obvious. The market won't give the bears such a windfall.
Michael Kahn, a longtime columnist for Barrons.com, comments on technical analysis at www.twitter.com/mnkahn. A former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, Kahn has written three books about technical analysis.
Copper prices were trading benignly last week until Friday when they quickly fell 4.2%. Many were caught off guard by new reports of weak economic data in China. But as chart watchers like to say, surprises happen in the direction of the trend. In this case, that trend is down. And chart patterns suggest there is much more downside ahead.
While copper now trades at levels last seen in July 2010, bulls can argue that the current decline was a knee-jerk reaction to events and an overshoot of technical support on the charts.
Investors can track copper via the iPath Dow Jones UBS Copper Subindex Total Return exchange-traded note (ticker: JJC), but the Comex copper futures present a clearer picture for analysis (see Chart 1).
Chart 1
Copper In this chart, copper dipped marginally below a long-term support level that has been in place for several years. On this time scale, the breakdown is not significant; therefore, bulls can say it was a merely due to short-term selling momentum.
Bears can argue that the late-December rally and January decline represented a failed upside breakout. In technical analysis, failed bullish signals usually turn into bearish signals; indeed, the trend has been solidly to the downside since then.
So which case is stronger? Sentiment data indicate there is no evidence that a full-blown panic has set in. According to the Daily Sentiment Index survey of traders compiled by veteran trader Jake Bernstein at Trade-Futures.com, 34% of traders are bullish. Readings below 20% bullish have typically indicated a market where fear dominates and conditions are ripe for a rally to begin.
In other words, sentiment has not tipped so far to the bearish side to give us any signals. And that suggests the bottom is not yet in.
To be sure, major copper mining stocks such as Freeport-McMoRan Copper & Gold (FCX) and Southern Copper (SCCO) have not broken respective support levels (see Chart 2).
Chart 2
Freeport-McMoRan Copper & Gold Moreover, other industrial metals, and many of the companies that mine them, are trading flat to higher over the past few weeks. This includes metals from nickel to lead and stocks from Rio Tinto (RIO) to Alcoa (AA).
While this column does not delve deeply into fundamentals, supplies in the global copper market are tight, according to a recent Commerzbank report sent to its clients.
Could that mean the marginal break of technical support was indeed an overshoot and prices will rebound? It could, but without traders showing extreme bearishness there may not be the fuel needed -- i.e., shorts needing to cover their positions -- to fuel a major rally.
If the current breakdown is real, the downside could be substantial. From its current $2.96 per pound, the breakdown below support and the "triangle" pattern in place since 2011 targets $2.00. And there is no major chart support until the 2008 lows in the 1.50 area -- nearly 50% below current levels.
But let's not get ahead of the market. For now, the trend is down even though conditions are oversold in the short term. It is likely that we will know within a few days if copper is going to hold or fold. And if it does continue lower the downside targets mentioned above seem too obvious. The market won't give the bears such a windfall.
Michael Kahn, a longtime columnist for Barrons.com, comments on technical analysis at www.twitter.com/mnkahn. A former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, Kahn has written three books about technical analysis.
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