Copper Approaches Critical Support Level

02/10/2010 12:01 am EST

Focus: COMMODITIES

Maybe, maybe not! With the metal firmly ensconced within a solid weekly down cycle, the probabilities still favor trading pullbacks against the dominant trend rather than looking for a countertrend entry. Nevertheless, shrewd and nimble daily and intraday traders may want to monitor copper for a tradable daily bounce higher.

Let's take a look at the daily chart for copper (Figure 1):


Click to Enlarge

The 200-day EMA frequently acts as a major support/resistance barrier, particularly after a strong up or down move by a stock or futures contract. Experienced traders might wish to monitor for a suitable countertrend entry should the area near 283.00 offer firm support.

We'll start with the continuous daily chart for COMEX copper. No question about the validity of the current downtrend, especially since the RMO system has a confirmed short entry, and copper has also plowed right through the Fibonacci 23.6% retracement level with nary a bounce. Currently, copper is sitting just above its 200-day exponential moving average (EMA), a key moving average that frequently acts as a tradable support/resistance barrier, particularly after a sizable move up or down by the tradable in question. Given the major move south by copper so far, daily and intraday (30- to 60-minute time frames) traders should monitor the price action near 283.00 for possible long swing trade setups, bearing in mind that this kind of countertrend trade carries more risk than a trade that's in line with the main trend.

If you can time a countertrend long entry with a stochRSI(10) indicator, you may wish to run a close stop (near the 200-day EMA) and then run a two- to three-bar trailing stop, hoping to lock in a profit if the stochRSI clears its upper signal line before copper starts correcting lower again. The 50-day EMA in copper is near 315.00, so any retracement move getting above 300.00-310.00 might be a great place to close out a long swing entry and/or start looking to time a fresh short entry.

If such a short entry gathers steam, subsequently taking out the 200-day EMA on heavy volume, expect prices to fall to at least the 38% Fibonacci retracement near 265.00. Copper's 200-week EMA also resides in that same vicinity (near 264.00) and should also offer major support, at least for a while, depending on how vicious the selling may get by then. Currently, large speculators are still net long even as the commercial interests are heavily short, suggesting that there could be a lot more selling to come before the commercials (who buy and sell copper for their business needs rather than for speculation purposes) begin to step up to the plate and start to acquire more of this essential metal, building inventories in anticipation of this year's building season.

Bottom line is this: Copper may find a temporary low near its 200-day EMA, one that might afford sharp traders a reasonably tradable countertrend swing trade. Less experienced traders (that is, 90%-plus of all people now trading) would probably do better to wait for a lower-risk short pullback swing trade entry, especially if copper makes it back to the 300.00 price level or higher.

Bear in mind that copper trades with much lower liquidity than the gold market does, making it essential that you have access to a top-flight broker with modest commissions. Even with that caveat, it is amazing to behold the trend and swing moves that this particular market can and does make from time to time. Be sure to size positions wisely, however, and to always use a real stop-loss order.

By Donald W. Pendergast, Jr. of ChartW59.com

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