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Copper in slow recovery

Copper wire. The commodity was trading at five-year lows Wednesday.
Muriel de Seze | Photodisc | Getty Images
Copper wire. The commodity was trading at five-year lows Wednesday.

The health of the price of copper, shown here in cents per pound on the weekly chart, is a guide to the health of the world economy. The weekly copper chart suggests world economic health is beginning to improve but it's too early for a celebration.

The price of copper has a long history of testing, and then retreating away from the upper edge of the long-term group of moving averages in the Guppy Multiple Moving Average (GMMA) indicator.

So what is different this time with the price testing the upper edge of the long-term GMMA?

The first difference is that the long-term downside target price for copper has been achieved. The dominant feature on the chart was the equilateral triangle pattern. The downtrend trend line in the pattern started in September 2011. The uptrend line started October 2011. The height of the pattern is measured at the base. This value is then projected downwards from where price moved below the uptrend line in March 2013.

This gives a downside target of 250 cents and this target was achieved and exceeded. The 250 cents level is now a significant resistance level. A close above this level is very bullish.

The second and most important difference is the behavior of the long-term group of averages on the weekly chart. The long term GMMA became widely separated in December 2015. The recent price rally from 195 cents to 230 cents has caused a significant compression in the long-term GMMA.

The degree of separation remains wide, but the compression behavior is quite strong. This suggests a significant change in the way investors are thinking about future economic growth and the future price of copper

This is not a signal for an immediate price breakout. However, it is an indication that the relentless downtrend pressure in the copper price may be easing. This is a long-term chart so the recovery pattern may take another three to six months to develop.

Investors should watch for the future development of long-term consolidation chart patterns to develop. These may include a rally to near the 250 cents level followed by a retreat and then another rally that retests the resistance level. Any future rally has three major obstacles.

The first obstacle is the strong resistance near 250 cents. The second obstacle is the strength of the downtrend as shown by the long-term group of moving averages in the GMMA indicator. These are currently showing signs of compression but until they compress completely and turn upwards, they continue to provide an obstacle to a new uptrend.

The third obstacle is the recent support band resistance level near 290 cents. A new uptrend is confirmed when copper is able to stay above the 290 cent level.

The chart suggests that the outlook for copper is slowly improving. Doctor Copper is on the way to recovery.

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