At time of publication, copper is down 2.5% YTD after hitting a new record high in early March. That might shock investors who stopped following the red metal market after optimism on China's economy just 15 months ago pushed the metal to a decade high of $4.713 in 2021.
However, currently the world's second-largest economy—a significant user of imported copper—seems to be in a tailspin. The Asian nation's economy is contracting, beset by a host of problems including ongoing COVID lockdowns and what many believe to be unprecedented indebtedness.
When copper hit a record just one year ago, many investors dived into the commodity assuming it would be an inflation hedge as they bet on a global economic recovery. Now, of course, the picture is somewhat different.
The metal is down 12.2% since its Mar. 7 all-time high. Worse, copper has dropped about 16% from May 12 low, just a short distance from the -20% mark which would indicate a bear market.
If you think the recent price bounce means copper is now on the rise, take a look at the daily chart.
The price has fallen below its 200 DMA. Since that occurred, the moving average itself began falling too. At the same time, the 50 DMA has been dropping toward and is threatening to cross below, the 100 DMA—which is also falling.
The price plunged 9% within a week—for the second time in a row since April. We view the recent rebound as part of a Rising Flag formation.
The initial tumble is the Flag Pole, and the rising congestion is the body of the flag. The assumption of such a crowded rise after a sharp drop is that the recent advance is not a sign of bullishness but rather traders covering shorts after a windfall.
Presumably, the reason the price isn't going up as sharply as it came down is that other traders, who missed out on the last leg down, regret their previous indecision—or wrong decision if they bought—and are now determined not to miss another such opportunity (if they're right).
A downside breakout would demonstrate that supply (of new bears) drowned out the demand (from old bears, covering shorts) and that sellers are willing to find new buyers at lower prices. That move is expected to create a domino effect, which includes a trigger for old bulls to get back in and stop-out stubborn bulls in order to attract more bears.
If the pattern completes, it will imply a target that repeats the Flag Pole's downside from the point of breakout. So, if the breakout occurs at about 4.3000, the minimum expected decline would be 4.3000 (point of breakout) -0.4030 (expected move), with the price heading to 3.8970.
However, if the price does get to that level, it would trigger another trading pattern, visible on the weekly chart.
Via the broader view, it's clear the Flag Pole penetrated the bottom of a rising channel since the May all-time high. The rising body of the flag is facing resistance from below according to the technical principle that broken support is expected to turn into resistance.
Furthermore, we might also be witnessing the making of a Double Top since the May 2021 high, above whose neckline the price jumped, with the assistance of the 100-Week MA. The 50 WMA is realigning with the bottom of the Rising Channel as both MAs squeeze the price, forcing it to pick a direction. The MACD, RSI, and ROC are all providing sell signals, suggesting the price will follow suit and fall below the neckline to complete the Double Top.
To determine a minimum target, measure the pattern's height at its lowest point, from the 2021 high to the 2022 low, indicating a drop of 8,030 pips. Subtract that from the verge of a breakout: 4.0000 - 0.8030 = 3.1970. That's significantly lower than the flag's minimum target.
However, the lower the target becomes, the more exposed a trader would be to market changes. And even if the price does ultimately get there, it would occur amid ups and downs. Therefore, you must trade according to your temperament, budget, and timing.
Trading Strategies
Conservative traders should wait for the Double Top to complete before risking a short position.
Moderate traders could wait for the flag to complete.
Aggressive traders could short now, counting on the flag's development precisely below the broken rising channel and its expected resistance, provided they accept the higher risk proportionate to the higher potential rewards.
Ultimately, sound money management will determine one's success or failure. Here's a generic example:
Trade Sample – Aggressive Short
- Entry: $4.3100
- Stop-Loss: $4.3600
- Risk: $0.05
- Target: $4.0600
- Reward: $0.25
- Risk-Reward: 1:5