What's the Current Lecture from Dr. Copper?

Gordon Scott |

The ADP Non-Farm Employment Change report wildly outpaced its forecast at the same time (even in the same hour) that the world’s central bankers coordinated their efforts to stave off a Eurozone debt crisis. That little bullish news item contributed to the heady 4% rise in the major indexes Wednesday.  But Thursday’s news had a different tone. The jobless claims number surprisingly rose above its forecast. This bearish news item may have some investors scratching their heads wondering what to expect from the economy as we approach a new year.

Perhaps we can take a cue from the price of copper. The price of this otherwise pedestrian metal is thought to be a leading indicator for economic conditions. An increase in the demand for copper can signal an increase in demand for so many other things as well, in turn implying an overall rise in economic conditions. So where are copper prices now? Though the price of copper fell sharply during August and September, it has decidedly rebounded since then. Is this just fluctuation in a downtrend or is a reversal signaling a new uptrend.  Evidence suggests the latter.

Head and Shoulders below the rest

To see this evidence clearly we have but to look at a chart of copper futures prices and observe the current pattern emerging there. Here we see some evidence of a trend reversal underway.

The price has broken above its downward slope in a tilted version of the inverse head-and-shoulders pattern. Technicians recognize that this signal implies a continuing upward move. Notice also the line below the chart. This study is called a Detrended Price Oscilator. It attempts to mathematically remove the direction of the trend—thereby delineating the most recent price fluctuation independent of trending moves. Notice that the DPO line moves above its zero point just as the trend-changing pattern completes. This is corroborating evidence for a continuation of this move.

What if you can’t see the future?

For those who don’t have access to futures quotes, don’t forget that you can get a rough estimate of copper prices by following the ETF that tracks copper prices (JJC). Additionally two notable copper mining stocks also tend to follow copper prices closely:  Freeport Mcmoran (FCX) and Southern Copper Company (SCCO). These companies are trading at lower-than-market Price-Earnings Ratios (6.85 for FCX and 11.35 for SCCO compared to 13 for the S&P 500 average).  Their charts are shown here for comparison. Notice that each of them sports a variation of the inverted head-and-shoulders theme shown on the copper futures chart.  Reasonable trades on the copper miners would be to make an entry after the price crosses the trend line, and then set the stop loss below the level of the downward-sloping trend line until the price trend proves to continue going upward. Reasonable expectations for the markets would be that if Copper continues to rise, the markets will as well.

 

 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
FCX Freeport-McMoRan Inc. 10.63 -0.35 -3.19 22,336,624
SAN Banco Santander SA ADR 4.43 -0.14 -3.06 4,115,797
SCCO Southern Copper Corp 25.96 -0.31 -1.18 1,014,283

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