Copper Breakout?Analysis of Copper - is a breakout from the near 2-year trading range imminent?...
originally published February 25th, 2008
www.clivemaund.com
We haven’t looked at copper for a long time, because it has been stuck in a giant trading range that has continued for approaching 2 years now, but with the chances of it breaking out to new highs soon rapidly increasing, it is considered timely to take a look at it. With copper being the most important product for some mining companies and an important by-product for many gold and silver mining companies, its price has important consequences for their profitability, and thus for their share prices, in addition to which a rising copper price has inflationary implications, and is thus an additional bullish factor for gold and silver.
The 3-year copper chart looks encouraging. After a parabolic ascent that resulted in it becoming wildly overbought by May - June 2006, the price has been floundering around in a giant bullish Ascending Triangle for a period approaching 2 years, and after the sharp rally of recent weeks is again challenging the resistance at the top of it. The importance of this resistance zone is amply illustrated by the fact that the price has already been turned back by it no less than 4 times, so this is its 5th attempt to surpass this level. Clearly, if the price should now succeed in breaking above this key level, a rapid ascent is likely, and the fact that an Ascending Triangle has formed suggests that this is likely. However, we should take note of the Flat-topped broadening formation that has developed within the larger trading range over the past 9 months. Normally these patterns have bearish implications and indicate that even though further upside is possible, a top is not too far away, but in this case not much importance is attached to it - because of the larger Ascending Triangle pattern and because of the distortion resulting from the drop in the dollar whilst it formed - when we plot copper against the Euro over the same time period, which we will now do, no such broadening pattern is evident.
While a large bullish Ascending Triangle appears on the 3-year copper chart in dollars, when plotted against the Euro we see another triangle, a Symmetrical Triangle, which has a downward sloping top line. This should come as no surprise since the Euro has been strong relative to the dollar during the period in question. In addition to the fact that a bearish broadening formation is not evident on the Euro chart, as mentioned above, when comparing the dollar and Euro charts it is interesting to observe how the price has been turned back repeatedly by a horizontal resistance line at the top of the bullish Ascending Triangle on the dollar chart, and the downsloping Symmetrical Triangle boundary on the Euro chart. Quite obviously a breakout on both these charts should occur at the same time and will be a highly bullish development and thus viewed as a strong buy signal.
With regard to timing, although Copper is short-term overbought after its rise of recent weeks, we can observe that it is quite well along both the triangles on the charts presented here, and thus breakout could happen soon now, and if it does occur soon, it will imply vigor and have stronger upside implications than if it continues to dally and move towards the apex of the triangles.
The assertion by some that copper will fall after the Chinese have finished preparing their Olympic facilities is, of course, ludicrous.