I received an email about a week ago from a loyal reader. I was late in responding, but am glad I checked my email because it led to a pretty good analysis which you are about to read right here at Online Trading. I thank him for writing me because it led to this write up. So credit in part goes to him...
What I am talking about is the commodity COPPER. This post sort of follows a theme I am on recently which is commodities. If you visit Online Trading regularly then over time you will realize a few important things, one of those things is that commodities is and will continue to be a big story. Why? Well the answer is simple. The previous 20 years saw a love affair around the world for paper. Paper assets that is... Stocks and bonds come to mind.. Dow Jones Industrial average, Nasdaq... these are the paper asset kings.
During that same 20 years...
the world hated things, or commodities. Commodities were sold off and considered unimportant, not necessary and having no great value. Gold, Silver, Copper, Zinc... all these things were sold off and ignored...
But now we have come full cycle and a reversal of sorts is taking place. Commodities are now getting the upper hand. This does not necessarily mean that stocks and all paper assets are going to plunge into a bear market. The reason I say this is because even if there is an aggressive inflation stocks themselves can be inflated and while it may appear that they have a very high value, in reality it will not be so significant because of inflation itself. For example, even if the Dow Jones Industrial average goes to 20,000, it could very well be that a dollar bill at that time is only really worth 50 cents. Get my point?
Anyway, the first chart is of the commodity copper and is a very powerful chart because it speaks volumes about the state of the commodity trading market. First, note that the price of copper has generally been in a bearish sideways trend or basing pattern for about the last 14 years. This fact alone is very significant because it makes a statement about risk/reward and what to expect in terms of future activity in this commodity.
Very important to note is that the copper price broke out above its long term resistance with volume making the breakout valid. The two trendlines I drew near the 150 level show what looks like a rising wedge . A rising wedge is somewhat of a tricky technical pattern because it can have either bearish or bullish implications. I would say it much more 50/50 type pattern than an ascending triangle for example. But, sometimes you have to make exceptions and need to dig further for more analysis to make your conclusions... Probably experience and time is what helps here. If you look at enough variables, then you can come to a more sound conclusion about what copper will do...
Lets look for some other hints. Aha! Well one of them is that the CRB index has recently broken out to a new high after a long basing pattern. This is indeed a pretty big hint. What else.. hmmm. Well another tiny hint is in the most recent combined continuous copper contract volume shown for the most recent month (February) in the first commodity copper chart above. The volume is hinting that copper wants to move and break out north from this rising wedge pattern. Indeed, in my experience, when a commodity or any stock or index for that matter breaks out north from a rising wedge, it is usually a pretty big and persistent move. It is quite scary too and hence the phrase " climbing a wall of worry".
This second little chart to the left is a close up zoom in of the actual rising wedge pattern of the commodity copper. The pattern is quite clear and easily identified. Technically, the upward slowing lines depict a gradually weaking demand situation. That is the dictionary definition in terms of technical analysis. But again, experience and a closer look at the commodity chart tells us maybe something else is going on.
Lets look at yet another chart and zoom in even closer. This chart is similar to the one I received from the reader mentioned at the beginning of this article. This is a much closer zoom in on the last 6 months or so and what we see here is an ascending triangle pattern. Isn't that quite fascinating? The commodity copper chart at first glance shows us a possibly bearish situation. But then, looking closer at the chart in search of the truth we see that in the near term a very bullish technical analysis pattern exists. Indeed, not only is the pattern bullish, but it has already shown signs of an early breakout with volume. So, we have a smaller time frame very bullish and reliable pattern WITHIN a 'so-so' technical pattern. Another good clue for us in determining where the commodity copper is going.
Any more clues? .. Hmm.. What? You say you want another clue ? Let me see if I can oblige...
Aha! Yes, there is another clue dear friend and this time it comes from the S&P 500 index. Do you see that rising wedge on the S&P 500 index? Note how it broke out north of the rising wedge. This is a good, no not good, more like great example of how a rising wedge technical analysis pattern can turn into a very bullish situation. I remember specifically near the end of 2003 that many who study technical analysis were quite bearish at the time. I must admit I too was quite cautious during this time because I saw the rising wedge pattern and could not help concluding that indeed the pattern had some good potential for bearish implications. But it did not happen, it proved many people wrong and broke out north. Everyone became bullish during the period of that breakout, extremely bullish. And that marked the euphoric peak for almost a year in the S&P 500.
Now, the S&P really has nothing to do with copper. I just wanted to show you a good example of how a rising wedge, normally feared, can turn into the exact opposite and very bullish situation!
So the clues to me are enough at this point to say that I believe the commodity copper will break out north from this rising wedge pattern and do so in quite persistant way. This is what my experience in chart reading tells me.
This chart to the left is of an actual commodity based copper stock. If you like stock charts and you consider yourself to be a pretty good technical analyst, then this chart will probably get your attention. It is a dream stock chart and a great example of how once a powerful trend sets in motion it is not likely to stop. Powerful persistent uptrend. The reason why this commodity based copper stock moved with such persistance is for no other reason than because the commodity copper price had its own very powerful upward rally in late 2003. This stock actually started moving before the upwards explosion in the commodity copper. This was definitely an very powerful online trading opportunity to those who were early and smart enough to identify the trend before it actually happened. So what is the name of this stock?
Don't worry I will tell you shortly, because the price action to the left only covers the period ending in 2003. There is another huge developing story with this stock and it is based on the commodity copper.
Commodity based stock trading is definitely a unique form of market analysis. With individual stocks you analyze their fundamentals, their technicals and other factors to determine their future price movement. But with commodity based stocks you must carefully analyze the underlying commodity itself as a means of predicting where the stocks in that sector will go. It certainly offers a different angle and approach, but can be quite profitable if you know what you are doing.
Ok enough of elaborating on this one. It is time to move on to a more longer term view of the stock that has shown an amazing uptrend during the commodity copper's breakout.
And the winner is...
FCX, or Freeport Mcmoran, is the winner. That is the stock depicted in the larger chart above and in this smaller chart next to this text. This is a commodity based copper mining stock. Indeed this commodity based stock chart looks very attractive to me. On a scale of 1 to 10 with 10 being the most attractive I would rate it a 9. I rate it this high because the three blue arrows indicate a pretty reliable reverse head and shoulders pattern that has sustained itself on the longer term uptrend. Major bonus points for doing that! Also, read carefully my analysis in the paragraphs above this one. What did I talk about? The commodity copper and how its pattern and trend indicates a high probability that it will break out north in probably persistent fashion.
To me, the writing is on the wall. The overall FCX chart pattern combined with the evidence on the commodity copper shows a high probability situation that FCX will breakout north from its reverse head and shoulders pattern. The price objective is 60 based on standard technical analysis measuring methods.
I will revisit this story in a future posting. To be notifed exactly when I do revisit the story, be sure to add Online Trading to your KLIPFOLIO or enter your email address on the box on the homepage that says 'enter email here'. For now, let the trend be your friend and the price be on your side...
P.S. Wow, this was a whopper of a post.. I really don't know if I can keep the posts coming in so long... Maybe better to have them in bits and chunks, short and digestable, don't ya think? 🙂