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Copper in Downtrend, Could Test $2.80: Charts

Tuesday, 11 Oct 2011 | 8:02 PM ET

In the 18th century something described as ‘copper bottomed’ meant good quality and guaranteed. The expression came from the copper bottomed wooden hulled British warships that guaranteed the supremacy of the British Empire on the seas.

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GUPPY RESIZE 1110.png

It remains to be seen if Comex copper can develop a reliable bottom and provide some guarantee of a rebound.

There are three technical features on the Comex weekly copper chart.

First is the small head and shoulder pattern that developed between December and March. This reversal pattern was nearly invalidated with the strong rebound from the neckline trend line in April. The downside target near $3.60 per pound was decisively broken in September. This head and shoulder pattern is a weak reversal pattern in this case because of the strong rebound in July.

Second is the very broad consolidation support area between $2.80 and $3.60. This consolidation band is intersected with a longer-term historical support level near $3.30 and this is where current consolidation is developing.

Rather than a strong rebound and a change in trend direction this broad consolidation band suggests an extended period of rally and retreat activity similar to that seen between September 2009 and September 2010. This is slow behavior, with rally trends lasting several weeks.

This is a strong downtrend and it will not be easily reversed. The historical activity shows strong consistent support near $2.80 and there is a high probability this level will be tested again. The nature of the consolidation activity will provide the information required to specify breakout triggers.

Third, in the short term on the daily chart, traders will watch for the development of Relative Strength Indicator reversal signals. This is created with when the trend line on the lows of the price chart move in the opposite direction to the trend line on the lows of the RSI indicator.

These are price lows created by a retreat and rally behavior so they create a series of valleys. Divergence is a good indication that consolidation has ended and that a new uptrend breakout is developing. The two valley lows are most likely to be associated with tests of historical support near $2.80.

Successful tests of support and the development of an RSI divergence will signal a ‘copper bottomed’ recovery.

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's 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.

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