Charting Asia

Copper moves towards downside targets as China wavers


China and copper go hand in hand; China is the world's largest consumer of the red metal, accounting for around 40 percent of global demand. Thus it comes as no surprise that China's startling trade figures released over the weekend contributed to a substantial drop in copper prices.

Official data showed China moved into a trade deficit for the first time in 11 months in February after exports fell 18.1 percent on year, raising concern over the health of the world's second largest economy.

(Read more: Copper's 'fall out of bed' underscores China woes)

The drop in copper prices reflects a bearish view on the world's second-largest economy. The key industrial commodity's performance is often used as a guide for economic growth and development.

The weekly COMEX copper chart confirms the long bearish economic outlook at a time when other economic indicators suggest a bullish outlook. It's a significant contradiction; usually a rising DOW index, which suggests economic growth, is matched by rising copper prices.

The weekly COMEX copper chart is dominated by a long-term symmetrical triangle – a very long-term chart pattern that's used for strategic analysis. The pattern developed over 14 months and it may take another 14 months before the pattern targets are achieved.

(Read more: Copper's swoon- Bad omen for China?)

The equilateral triangle is a pattern of indecision. The bullish optimists in the market push prices higher, which is shown by the rising trend line. The bearish pessimists push prices lower, which is shown by the down-sloping trend line. These two trend lines suggest indecision in the market as there is no clear bullish or bearish pressure. The probability of an upside or downside breakout is around 50 percent. Early in 2013 the pattern broke to the downside and found support near $3.00 per pound.

Getty Images

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

The base of the symmetrical triangle for copper developed in September, 2011. It's 91 cents in height. The value is projected downwards from the point where the price moves below the lower trend line near $3.52. The downside target for copper using the symmetrical triangle pattern is near $2.61. A downside projection from the tip of the equilateral triangle gives a target near $2.80.

(Read more: What that China debt default means to the market)

The long-term weekly chart shows a well-established support level near $2.80. 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 some probability of a fast temporary dip and test of the downside target near $2.61. This is part of a trend exhaustion move and signals a buying opportunity for long-side traders.