Copper and the Dollar

By: Sol Palha | Fri, Jan 9, 2009
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Copper

"Our greatest glory is not in never falling, but in rising every time we fall." ~ Confucius BC 551-479, Chinese Ethical Teacher, Philosopher


Chart courtesy of www.prophetfinance.com

It is said that the economy usually mimics the copper markets, and upon examining the above chart of copper, it appears that the economy and copper are trending in the same direction. Copper is now closer to a bottom than a top and hence from this we can infer that the markets are also close to putting in some sort of bottom, if one takes a long term perspective. Copper started putting in a top formation as early as in May of 2007, though the real correction only started to gather steam around July of 2008. It is now giving the first signs of a long term bottom formation, even though in the short term there is a possibility it could momentarily spike down to the 105-110 ranges.

Technical outlook

The 141-144 ranges provided a very strong zone of support and once this was violated, support turned into resistance. Interestingly enough copper after dipping into the 125 ranges was able to rally above 144 with remarkable ease, indicating that this long term zone of support is probably going to hold on a monthly basis. Without a doubt copper is closer to setting a long term bottom than it is a long term top. From a long term perspective, the current pattern is indicative of a long term bottom, and traders would be wise to start looking into the possibility of taking small bites in some of the key players in this sector. If for some reason copper trades down to the 110 ranges, traders should view this as a long term screaming buy. A close above 160 would significantly diminish the chances of copper trading down to the 110 ranges.

Copper has a tendency of putting in a bottom well in advance of the markets and it usually provides an early signal of a potential change in market direction. During the last strong correction, which lasted from 2000 to early 2003, copper bottomed towards the end of 2002, well in advance of the markets and the general economy. Thus a change of direction in the copper markets could provide the first signs of a turn around in the markets and possibly the economy too.

Fundamental outlook

With the massive amount of new infrastructure both China and India need to develop in the years to come, not to mention the billions of dollars that are being ear marked by the Obama administration for the maintenance and development of new infrastructure related projects, long term demand for copper is bound to remain robust. Copper has undergone a blistering correction of over 68% in a period of roughly 6 months and we don’t believe that copper is going to trade at such low levels for ever. PCU and FCX are both top players in this sector and traders should consider opening up small positions in them now and use strong pull backs to add to current positions. Do not simply jump in and take one huge bite. Money management and patience are key ingredients to winning in the markets; patient and disciplined individuals are usually handsomely rewarded, while stupid and greedy individuals usually end up gnashing their teeth in pain.

Dollar

As stated before if it hits 81, it should mount a relief rally that takes it back to the 83.00 ranges, if not, it will most likely trade all the way down to the 75-78 ranges. Market update Dec 16, 2008

After trading as low as 78.77 on the 18th of December, the dollar has since managed to mount a decent rally. In order for this rally to gather steam, the following conditions need to be met;

  1. It cannot close below 78.77
  2. It needs to trade above 84 for 3-6 days in a row

If it can fulfil the above two requirements, the dollar will have a very good chance of testing its old highs and possibly putting in a new high before mounting a strong correction that could last till the end of 2009.

A market that has mounted such a strong rally does not simply break down in one shot; the normal course of action is a rapid pull back, followed by a strong upward move (blow off top) and then a more orderly pull back that potentially leads to a series of new all time lows.

The dollar has to stay above 78.70 and rally past 84 to turn the short term trend upward. This whole pattern could take between 3-6 months to complete. Traders who are bullish on the dollar can open up long positions via the ETF UUP (dollar bullish ETF) or short the Euro via DRR, as the Euro usually trades in the opposite direction to the dollar. We must point out that no matter how strongly the dollar rallies in the upcoming weeks and months, this rally will fail and the dollar will most likely end the year on a lower note; it could conceivably put in a new low before the year is out. Thus traders who are bullish on the dollar should look into closing any and all positions if and when it tests its old highs.

"Man who stand on hill with mouth open will wait long time for roast duck to drop in." ~ Confucius BC 551-479, Chinese Ethical Teacher, Philosopher

 


 

Sol Palha

Author: Sol Palha

Sol Palha
TacticalInvestor.com

Sol Palha is a market analyst and educator who uses Mass Psychology, Technical Analysis and Esoteric Cycles to keep you on the right side of the market. He and his partners are on the web at www.tacticalinvestor.com.

The information contained herein is deemed reliable but no guarantee is made about its completeness or accuracy. The reader accepts this information on the condition that errors or omissions shall not be made the basis for any claim, demand or cause for action. Any statements non-factual in nature constitute only current opinions, which are subject to change. The author/publisher may or may not have a position in the securities and/or options relating thereto, & may make purchases and/or sales of these securities relating thereto from time to time in the open market or otherwise. Neither the information, nor opinions expressed, shall be construed as a solicitation to buy or sell any stock, futures or options contract mentioned herein. The author/publisher of this letter is not a qualified financial advisor & is not acting as such in this publication. Investors are urged to obtain the advice of a qualified financial & investment advisor before entering any financial transaction.

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