Is Dr Copper leading the way for shares?
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I have been trading copper on and off for years and it can be a brute to trade with sometimes wild daily ranges. But lately, it has been very well behaved with accurate Fibs, trendlines and Elliott Wave counts. That is making it a dream to trade.
It has the nickname ‘Dr Copper’ because it is said to have a PhD in Economics and has in the past been a bellwether for the state of the global economy. Copper is found in very many places in industry and is probably the most widespread metal used in the economy. It is said that demand for copper (rising prices) rises with an improving economy and vice versa.
Of course, this is a very simplified rule and there have been periods where the relationship has not applied. Here is the weekly copper chart going back to the old highs in 2011:
Prior to that time, China was buying copper hand over fist as it engaged in a mammoth building boom and when it slowed, prices started down in a bear trend which to me appears in the shape of an A-B-C with the C wave low in 2016 and right on my lower tramline with a small momentum divergence.
As you know, this is one of my favourite setups for a contrarian stance. For the remainder of 2016, the market traced out a lovely wedge and when it broke above the upper wedge line (pink), that was my second signal to go long around the 2200 area.
And what a timely trade that was! From then on, the market just rocketed skywards to confirm my C wave low. And when it hit the 2600 area, extreme volatility set in with huge swings both up and down.
But all this action was totally understandable when being guided by the Elliott wave principle! The September high was wave 3 of 5 and the decline to the May low was red wave 4 and the rally off that is the final red wave 5 which is the wave we are in.
I could also draw in a tidy pink tramline pair and the market is currently moving above that to confirm the trend is up and is about to test the main blue trendline.
In fact, the rising copper price was consistent with the rising share markets.
So my trade at the 2200 level is looking good – but I confess I had some nervous ticks during the huge consolidation phase! I had played the trade as a reasonably long-term campaign and although I took some profits near the red wave 3 high, I was content to sit back and let the market tell me if it wanted to move higher or not.
In fact, I received another buy signal at the 2640 area in May and I have a full position.
So what does this bull trend in Dr Copper tell us about the share market? Undoubtedly, it is certainly not a negative! Unlike the majority of the MSM where a flurry of bearish disaster gloom-and-doom warnings abound, copper (and the other basic commodity, iron ore) are saying it’s not yet time to expect a major sell-off.
And right on cue, the Dow is making a new all-time high as I write
But this is the final wave 5 of 5 and I believe is the final wave up I have been waiting for. This is the melt-up phase now and who knows when the market will turn?
Sentiment indicators are running uber bullish. Latest COT data shows money managers savagely reducing their short bets. Also, the latest AAII retail investors survey shows the US mom ‘n pop investors have a near-record level of stocks-minus-cash in their accounts at just over 50%. Since the millennium, this figure has been way under 50%, indicating the relative caution shown by this cohort (holding more cash than shares). But now they are so positive about future stock gains, they have allocated a record amount of cash to equities.
This is a big red warning signal and totally consistent with the market being in the last throes of the post-WWII bull market. But lurking in the wings is the elephant in the room – the pile of dung (I mean debt). The Bond Bubble is already bursting with yields edging up.
Pay no attention to today’s soothing words from the BofE that they are not yet ready to raise the Bank Rate (that has boosted the FTSE this afternoon). They are on the floor now so the only way is up – and gilt yields are already rising in tandem with Treasuries. The next turn up in yield (coming very soon) will hit shares hard and that is when I expect The Top to be put in. When the market turns, it will a thing to behold. And that day fast approaches.
But with shares now rising strongly towards their tops, where does this place copper? As I have shown, it is near the major resistance at the tramline and if it breaks through hard, then the Fibonacci 38% level at 29800 (top chart) would be a reasonable target.
But the current rally is in the context of a bear market rally. When shares turn down hard, copper will follow and I expect to see new lows in die course.
