Aaron Lynch The meteoric rise of commodities across the globe has seen great trading opportunities appear over the last year or so. Much has been written regarding the virtues of gold and oil but there are other markets offering ample rewards - if you take the time to stalk them.
One of those markets is copper; a liquid market that has the ability to create good tradeable ranges. Another benefit is that for the last 6 months it has trended very well. There has been much said and written about the underlying demand for copper and all the fundamental reasons why that demand is surging. The basic concept for me is to watch the chart and look for my swing chart to guide me into and out of trades.
A basic summation of copper is that the futures contract is traded in New York on the NYMEX exchange (visit www.nymex.com for full details) and the margins for copper trades are less than say oil futures, for example. One thing to remember both in our domestic market or the US market is that there are many “copper stocks” that move in sympathy with the price of copper. This means you are able to get exposure to copper prices through these copper producing or trading companies if you are not yet up to trading the futures contract itself.
Taking a look at chart 1 you can see the monthly futures contracts HG-SPOTV. Since the bear cycle low in 2001 we have seen an extensive bull run. Taking a closer look at the last 9 months it can be seen that there has been an explosive move upwards, in line with many other resource commodities. The trend is definitely up but as with all bullish runs, there is a point where I start to question whether a market is potentially overbought. The pertinent question is; “What tools can you use to measure how far a market has moved?”
Chart 1 HG-SpotV Monthly
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The concept of history repeating is the key to the Gann style of analysis. To know if a market is overbought or oversold, I base the current move on the previous historical range. The monthly chart below focuses on the price range from the bear cycle low in 2001.
We can see that the copper market has done 150% of the Bull Run and found resistance. This may only be short term, so we need to use definite rules to keep us safe if we are trading short.
Chart 2 HG-SpotV Monthly
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Setting up a market in the big picture perspective is important to get big results. Now that we have a potential view on the large scale, we can zoom in and see if there is a setup on the daily chart (see Chart 3, below).
Assuming you were stalking this trade, you may be looking for the first lower swing top and a signal top for confirmation. These two key points were both signalled during the last week with an outside reversal day top and confirmation on the first lower swing top for entry.
Chart 3 HG-SpotV Daily
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Therefore, in the short term the trend is down on copper. In using big picture analysis we have looked at a potential resistance area based on history repeating. This has given us an area to start stalking from which we could zoom in and use the basic principles of form reading and swing charts to make our entry.
By the way, for those interested in watching a classic US “copper stock” that moves in harmony with copper you might take a look at PD Phelps Dodge. It has given us exactly the same resistance at the 150% and also the first lower swing top entry. Using your software, you can overlay the two charts and see the similarities immediately.
Good Trading
Aaron Lynch