Copper at an Intriguing Crossroads

 | Dec 19, 2011 | 6:10 AM EST
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I realize that gold and oil were last week's big stories, but what about copper? To my eyes it is sitting at an interesting crossroads.

First turn your attention to its action on the Friday after Thanksgiving. While the stock market was still heading south, copper had already made a lower low and turned upward. The following week, after the coordinated central-bank intervention, copper refused to make a higher high as the stock market struggled to eke out further gains. The metal did not retreat, but it did not continue upward.

Last week copper was down hard. But, unlike gold and oil, the uptrend line was revisited, rather than broken. Oil and gold both broke their respective November lows, whereas copper did not. Instead, it bounced off a downtrend line. In my view, therefore, copper is now an intriguing and possibly leading commodity to watch.


That uptrend is a good one, because it agrees with the basic geometric tenet of a trendline -- that is, two points make a line, a third confirms it, and the line improves as the number of points increases. Well, the line was touched a fourth time in last week's action. The day-after-Thanksgiving low was $3.20 per pound, so this level represents a previous low and an uptrend line, not to mention the downtrend line. Won't it be interesting if copper can hold that level?

So now we know what area to watch for downside. The upside will come in around $3.50. That happens to be the bottom of resistance, and where that red downtrend line will come in later this week. I suspect any rally toward $3.50 will fail. For now, however, it's quite interesting that the price didn't break down, especially since the action in bonds says the economy quite weak.

Turning to equities, we aren't seeing any positive divergences here, but the market is heading toward an oversold reading. Further, if the S&P 500 can reach a lower low than it did last Wednesday -- i.e., 1209 -- accompanied by fewer than 108 stocks making new lows, that would make for a positive divergence.

If the market comes down Monday in an options-expiration hangover, perhaps the bears will begin growling over the bear flag pattern in place on the S&P 500 chart. A break of that flag might even get the stubborn CBOE Volatility Index (VIX) to turn green, rather than continuing to languish at the lows.

S&P 500

In sum, a break of last week's low accompanied by fewer stocks at new lows, along with an oversold reading, would lead to a better rally around Christmas. Should the market break last week's lows without a contraction in the number of stocks at new lows, we'd see nothing more than an oversold rally.


Overbought/Oversold Oscillator -- NYSE

Overbought/Oversold Oscillator -- Nasdaq

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