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I recently watched a movie called The
Curious Case of Benjamin Button which some of you may have seen. In this film
the lead role, played by Brad Pitt, is born as a decrepit old man and gets
steadily younger until he eventually died of old age as a baby. To say that
it's ridiculous is the understatement of the millennium. Yet many people come
away from watching this film thinking "How wonderful, if we all kept
getting younger!" As a contrarian I instead found myself wondering about
the catastrophic effect on the cosmetics industry, as the market for
anti-aging creams would collapse.
I mention this because it was the inspiration for the title of this
article, because at first glance it looks like the copper price is going to
drop through the floor, yet on closer inspection there is evidence to suggest
that it is instead going to stage a significant recovery rally, which
supports our contention that there will now be some sort of recovery rally in
the broad stockmarket.
When you look initially at the long-term chart for copper, it appears to
be set to plummet to its 2008 crash lows at $1.25, and possibly even lower, but
then when you look more closely at it, bearing in mind that its latest COTs
look bullish, and sentiment towards it is in the basement, which is normally
also bullish, it can be seen that is has arrived at the lower boundary of a
potential major downtrend channel. It has actually gotten to this point in a
relatively measured manner, without an all-out panic, which is why it is not
more oversold on its MACD indicator.
 
As well as dropping to the bottom of the giant channel shown on its
long-term chart, copper has also arrived at the bottom of the expanding
channel shown on its 2-year chart, within a steeper sub-channel in force from
last May. On this chart it is clear that it could rally all the way back up
to the upper boundary of the expanding channel, which would take it to about
$2.50 - $2.60, and still be within its bearmarket downtrend. On this chart we
can also see that it has opened up a big gap with its 200-day moving average,
as it had exactly a year ago, which lead to a sizeable rally. The same could
happen now.
Other factors that increase the chances of an intermediate recovery rally
include the latest COTs, which show that the Commercials have built up a big
long position. They are normally right, while the Large Specs, who are
habitually wrong, probably because they believe what they read in the papers,
have built up a big short position.
Click on chart to popup a larger, clearer version.
The Hedgers chart, which is another form of COT chart, is also interesting
to see here, because it shows the 2nd most bullish position setup since at
least 2003.
Click on chart to popup a larger, clearer version.
Chart courtesy of www.sentimentrader.com
Sentiment towards copper is in the basement, as you would expect, with the
2nd most negative reading also since about 2003, as we can see on the copper
optix, or optimism chart. This too suggests a rally.
Click on chart to popup a larger, clearer version.
Chart courtesy of www.sentimentrader.com
Finally, the 6-month chart shows that copper staged a minor recovery rally
late last week to arrive at a resistance level beneath which a couple of
candles with longish "upper shadows" formed, suggesting that it may
back off a little early next week. Apart from that though, the other factors
that we have looked at point to an intermediate rally developing. On this
chart we can also see that the recent new low was not confirmed by momentum,
which is another positive sign.
"Alright, so what?", I here you ask - "There are few ways
to play a move in copper profitably, so what use is this to me?" In the
first place there is a big copper stock that is terribly beaten down and
looks like it is set to recover, that we will have a look at on the site very
soon. Because it is so terribly cheap, this stock could make a big percentage
gain quickly, and fairly close stops can be set. Secondly, what we are seeing
here has major implications for world markets at large, since if copper
rallies it is most likely to do so against a background of recovering world
markets, and that also means that oil is likely to recover as well, glut or
not.
We will end with a quote by Benjamin himself:- "Our lives are defined
by opportunities; even the ones we miss."
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