How to Read the Signs of Change—Trend Change, That is… (Part 4)

03/19/2009 10:14 am EST

Focus: STRATEGIES

Timothy Morge

President, MarketGeometry.com

There are no clear clues regarding the future price of bond futures. As long as prices stay below the 131 price that forms the base line, bond prices will remain under pressure. Although the media constantly bombards us with stories about the Treasury adding massive amounts of cash to the US banking system, the charts show that none of that cash is finding its way to the public—at least not yet!

Now let's look at copper prices. At one point in 2008, copper was trading so high that organized crime in major US cities were cruising through expensive neighborhoods and stripping large houses of their copper gutters and downspouts!

chart

In many ways, we take copper for granted in the United States. But in countries like China and India, there is so much infrastructure building going on that uses basic industrial metals that the demand is hard to comprehend. These countries just plain need these materials, and in many cases, these countries are price insensitive.  In the case of copper, the demand increased dramatically in 2004. There is a small chimney formation that I purposely didn't mark on this chart. See if you can find it and identify its base line. If you can see it, you'll find that the base line was tested, it held, and then prices quickly climbed above the top of the chimney tops. And with it, the geometric expansion of the price of copper was underway!

Once copper prices got above $400, old copper began to be magically “found” and sold to recyclers at an increasing rate. Melting down old copper is very economical, so it is a very lucrative business, especially when copper is nearly three times its prior historic highs.
You can see the first sharp selloff, and note that it left a perfect chimney and base line. The base line held, and price then rallied and consolidated between $275 and $375. The base line of this consolidation held, and after it was tested a second time, the price of copper began a new leg higher, this time making a new high for the move.

The last formation on this chart is a perfect chimney formation with a clean base line. The fate of copper in the second half of 2008 and into 2009 depended on the base line. If it were to hold, copper prices would trade higher. If it failed to hold, copper prices would trade lower to test one or both of the prior base lines.

Tomorrow, we will analyze what happened to copper in late 2008 and 2009.

More in Part 5 tomorrow…

Timothy Morge

timmorge@gmail.com
www.medianline.com
www.marketgeometry.com

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