A Panic Low in Copper, FCX?

08/17/2011 11:21 am EST


Thomas Aspray

, Professional Trader & Analyst

Chart patterns show the recent decline in copper prices is just a correction within the long-term uptrend, and continued weakness will present good buying opportunities.

Copper prices peaked in February as concerns over the growth rate in China, and therefore, the overall demand for copper, was a reason to sell. The Chinese cut back copper imports severely in the spring and prices have continued lower. Copper prices were hit hard last week when concerns over a new recession in the US added additional pressure on prices.

Though copper rebounded sharply from last week’s lows, Germany’s disappointing GDP numbers have increased concerns over the nation’s economy and dampened bullishness.

Chinese imports started to increase in June and recent reports from the London Metals Exchange indicate that Chinese buying has caused the copper inventories to decline in Asian warehouses.

So what’s ahead for copper prices? Technically, the decline from the highs early in the year just looks like a normal correction. Last week’s drop may have marked a panic low in copper prices and copper-mining stocks like Freeport-McMoRan Copper & Gold (FCX).

Let’s look at why another drop in copper prices could provide a good buying opportunity.

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Chart Analysis: The S&P GSCI Copper Spot Index is based on the spot price of the copper futures traded on the London Metals Exchange. The index tested its weekly uptrend from the 2009 low, line a, last week, but closed well above it. The low last week was below the weekly Starc- band.

  • The trading range, lines a and b, looks like a continuation pattern that should be resolved to the upside with targets in the 790-810 area. This is about 26% above current levels
  • There is initial resistance at 657-665 with stronger resistance in the 686 area
  • A close above the 705 level would complete the continuation pattern
  • Initial support now stands at 614 with major support in the 570 area, which corresponds to the highs from early 2010
  • The major 38.2% support level is at 521.25

NEXT: See Trade Set-ups for Copper ETN and FCX


Click to Enlarge

One of the best ways to trade copper prices—besides futures contracts—is the iPath Dow Jones-UBS Copper Sub-Index Total Return ETN (JJC). The weekly chart shows a long-term pattern of higher highs and higher lows going back to the early-2009 lows, line c.

  • The flag formation (lines a and b) is typical of a correction within an uptrend, and last week’s low at $50.59 held above the 50% Fibonacci retracement support at $49.30
  • This support also corresponds to the trend line support (line b) and the November 2010 lows at $49
  • The weekly on-balance volume (OBV) did confirm the early-2011 highs, but the heavy selling over the past few weeks has taken the OBV below support at line d
  • There is initial resistance now at $54.30 and then in the $56.50 area
  • A completion of the chart formation (lines a and b) has upside targets in the $65 area, which also corresponds to the 127.2% Fibonacci retracement targets

Freeport-McMoRan Copper & Gold (FCX) peaked at $61.34 in January, and with last week’s low of $41.20, it had dropped 32.8% from the highs.

  • FCX closed well of the lows last week at $45.40, leaving a long tail on the weekly candle chart. Similar action was seen at the March lows (see circles)
  • The weekly uptrend, line f, was broken on last week’s drop, and the 38.2% support from the 2010 lows ($40.90) was almost reached
  • The relative performance, or RS analysis, appears to be reaching a critical juncture. The long-term support, line h, from the 2009 lows was broken early this year. It has rallied from the lows and needs to move through its downtrend (line g) and its previous peak (see arrow) to signal it is outperforming the S&P 500
  • A drop in the RS below this year’s lows would be negative
  • The on-balance volume (OBV) is acting much stronger than prices, as it shows a pattern of higher lows in contrast to the price action. It is well above short- and long-term support (line i)
  • FCX has rebounded back to first resistance in the $47 area. The 38.2% resistance has been overcome, which indicates the 50% resistance at $51.20 should eventually be reached

What It Means: Though copper prices, FCX, and JJC have all been correcting from the highs made early in the year, the weekly chart patterns suggest that this is just a pause in the longer-term uptrend.

It appears that the corrective patterns are close to being completed, and last week’s lows may hold. A decline in either JJC or FCX toward these lows should be a good opportunity to get back into copper as the changing trend for copper demand is Asia is consistent with a resumption of the major uptrend.

How to Profit: For Freeport-McMoRan Copper & Gold (FCX), go 50% long at $42.28 and 50% long at $41.06 with a stop at $37.93 (risk of approx. 8.9%). Cancel the order if $49.15 is hit first.

For the iPath Dow Jones-UBS Copper Sub-Index Total Return ETN (JJC), go 50% long at $51.04 and 50% long at $50.26 with a stop at $47.48 (risk of approx. 6.2%). Cancel the order if $54.90 is hit first.

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