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Copper In for a Rapid but Temporary Fall: Chartist

Macduff Everton | Image Bank | Getty Images

Copper is a key industrial commodity and its performance is often used as a guide to economic growth and development. The COMEX copper chart is suggesting a bearish economic outlook at a time when other economic indicators are suggesting a bullish outlook. Usually a rising DOW index which suggests economic growth is matched by a rising copper price. This is not happening in the current situation so investors are looking carefully at the strength of the divergence between the copper price and other market indices.

The weekly COMEX copper chart is dominated by a long term symmetrical triangle. This is generally a pattern of indecision. The bullish optimists in the market push prices higher, and this is shown by the rising trend line.

The bearish pessimists are sellers, pushing prices lower and this is shown by the down sloping trend line. These two trend lines suggest indecision in the market because there is no clear bullish or bearish pressure. The probability of an upside or downside breakout is around 50 percent.

(Read More: Commodity Bulls Struck by Fears of Global Growth)

The most important feature of the symmetrical triangle pattern is the way it is used to project upside or downside price targets. Once the breakout has started there is a high probability these targets will be achieved. There is a higher probability that downside targets are achieved because it is always easier for a market to fall than it is for the market to rise.

The base of the symmetrical triangle for copper developed in September 2011. It is $0.91 in height. The value is projected downwards from the point where the price moves below the lower trend line near 352 cents or $3.52 per pound. The downside target for copper using the symmetrical triangle pattern is near $2.61.

The long term weekly chart of COMEX copper shows a well established support level near $2.80. This was created in October 2009 and tested as a support level in February 2010 and again in June 2010. There is a high probability this level will act as a support level in the current market retreat.

This combination of support features and chart pattern targets provides a clue to the way price action may develop. Traders will look for support to hold near $2.80. This level could see some consolidation develop. There is a high probability of a fast temporary dip and test of the chart pattern downside target near $2.61. This is part of a trend exhaustion move and signals a buying opportunity for long side traders. There is a higher probability of a rapid rebound and rally from near $2.61 and a new period of consolidation near $2.80. This pattern of price activity would form an inverted head and shoulder pattern and confirm the end of downtrend pressure.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBC Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.

If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.

NBC assumes no responsibility for any losses, damages or liability whatsoever suffered or incurred by any person, resulting from or attributable to the use of the information published on this site. User is using this information at his/her sole risk.

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  • Daryl Guppy is an independent technical analyst who appears frequently on CNBC Asia.

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