The copper markets, both cash and futures, have hit new all-time highs this week.
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Still, Wednesday's close could be interpreted as bearish based on applying the Horseshoe Proximity…
Commodity Bulletin: From crude oil to coffee, this FREE newsletter is for industry pros and rookies alike …or interpreting Wednesday's activity as a shooting star pattern on the the May futures contract's daily candlestick chart.
I don't usually spend much time analyzing daily charts. Though I've modified my stance on the Goldilocks Principle[i]over the years, focusing on monthly charts for long-term investment positions, I still view daily charts as too hot to get a good read from. I've said many times I was the world's worst day-trader back in the day when I tried such things. The older I get, the more I appreciate long-term trends on monthly charts and markets that follow patterns relatively well[ii].
All that being said, I want to talk this morning about copper. Dr. Copper, the honorary title given for its track record as an economic indicator. At Tuesday’s close, the Cash Index for Copper (HGY00) was at a new all-time high of $5.1845 (per pound). I’ve written about how the Cash Index for Gold (GCY00), the global safe-haven market, has grown comfortable at record high levels above $3,000 (per troy ounce), all the while Dr. Copper was climbing as well. However, at Wednesday’s close, I noticed the May Copper (HGK25) futures daily chart looked bearish. I see the hands come up from the technical analysts in the room, "May copper closed higher yesterday. How does the daily chart look bearish?"
- We can apply what I call the Horseshoe Proximity that tells us, "Close is close enough". May copper hit a new all-time high of $5.3740 during Wednesday's session, only to close at $5.2430, up 3.25 cents for the day, close enough to view it as a bearish spike reversal on a classic bar chart (open-high-low-close).
- If so, then Wednesday's move looks to be a Wave 5 peak within the 5-wave short-term uptrend
- At the same time, daily stochastics established yet another bearish crossover above the overbought level of 80%, a signal the short-term trend is set to turn down.
- For those well-versed in the study of Candlestick charts, which I am not, Wednesday's action could be interpreted as a Shooting Star pattern (see below).
- There are a number of criteria for a shooting star pattern[iii]
- With the key takeaways being
- The shooting star is a one-day pattern, indicating a potential bearish reversal.
- The pattern is an indicator, not a guarantee, of a bearish trend reversal.
What do we look for next? It would not be surprising to see a few days of consolidation, raising the previous 4-day low from today’s $5.0270. Once this happens, the contract will be in position to confirm a new minor downtrend. Downside targets based on Fibonacci retracements are:
- 38.2% ~ $4.8638
- 50.0% ~ $4.7062
- 61.8% ~ $4.5487
It's also interesting implied volatility of the market remains high, coming in above 26% early Wednesday morning. With noncommercial traders already holding a net-long futures position, and the May contract overbought (technically), the door is open to possible sales of futures and/or options. (Keep in mind those that make a living trading options are playing chess while most of the rest of us play checkers.)
[i] Daily charts are too hot, monthly charts are too cold, but weekly charts are just right.
[ii] You can read my Barchart piece on what market I like best (here). A quick hint: It’s King Corn.
[iii] You can read about them at this Investopedia page (LINK).
