$HG_F : Wireless Recovery Without Copper

Dr Copper coiling up in tight range while stocks surge. May be we are all wireless now :-)

Sign of potential disconnect between markets. Time for caution for any bulls going all in on these highs.

I am sure every one is basking in the glory of headlines about stock markets hitting their all time highs (Bah Humbug). The bull market of 2009 is incredible in that regard. It has crushed the bears, many top callers have been obliterated and the markets have come in the complete control of central bankers planning bailouts and engaged in money printing. It is quite likely that in such party, the sentiments can get carried away. After all, who has not heard the famous last words - just one for the road!

Even though I trade technically and what is in the charts, I like to keep an keen eye on fundamentals, eventually fundamentals do come out in charts. One such indicator of economic activity is Copper. If the growth is coming from economic activities, copper is one element which is used in abundance. Any real economic activity (bank bailouts are not real economic activity in case some one has doubts) ends up using copper. So demand and therefore price for copper can be a good indicator of what is happening in real world. In fact for that reason many market participants call it Dr Copper. Here is a 5 year weekly chart of Copper continuous futures compared to SPX (as magenta line).

Few things stand out:

Copper had correlated well with SPX and had acted like a leading indicator. Copper started bottoming out long before SPX turned corner in 2009. 

For the last 2 years while stock markets have been making higher highs higher lows, copper had been coiling and consolidating in a tight wedge.

And while the stock markets are just catching up, Dr Copper made its own all time high in Feb 2011 and since then copper is in a correction mode and on 5 year period copper is down nearly 9% while S&P is up nearly 20%. For the last 2 years copper is in a consolidation pattern and in a narrowing range. These periods of consolidation usually result into wide and violent move out of the range once one side or the other gives up.

Looking at the chart it appears that the likely breakout from this consolidation is probably going to be on the down side. There is also inclined head and shoulder pattern on this chart and breakdown from that pattern projects a 20% - 50% decline. Now these are very long term charts and it takes time for the pattern to develop but I for one is watching copper and any signs of break down from this wedge. I am taking short copper with stops outside the wedge above expecting the break down.

Another point to note is that SPX is now trading in the same region as Copper all time high. It is possible we might grind further up in SPX or even make new all time high. But unless copper starts supporting the recovery, chances are that we will enter a correction phase once again which can pull indices down 20% or more.

And for that reason even though I am trading $ES_F (e-mini S&P futures) from long side on most day trades, I am extremely cautious about potential correction. I would not like to be betting the farm on the upside at these price levels unless other indicators start indicating real economic growth.