Aaron Lynch Forget where gold is trading. Have you seen the truly stunning performer in the metals market? Copper is a market that has recently seen the type of movement that can give commodities trading a good and bad name in the same breath. Over the past three months this metal has gained considerably. Taking a look at the big picture shows a steady up-trend has been in place since 2003 and copper has slowly but surely climbed to record highs.
This type of move can be seen in many of today’s commodities markets where major bullish cycles are currently underway. The percentage change of commodities throughout history has seen moves much greater than those experienced in the equity markets. This provides much of the allure for traders to become involved in trading commodities as exceptional returns can be made. However traders need to be aware that in volatile markets, exposure to losses is also increased.
Copper has been swept up in the move of many of the major commodities markets globally as increased demand in economies like China and India are fuelling large moves in the metal and energies market. To understand the scope of this current movement we need to look at what this market has been historically capable of to determine whether the latest move is out of character.
The futures contract I have been tracking in ProfitSource is for high grade copper (HG-SpotV). Previous historical moves for this contract have been in the area of 200% to 300% from the price at the start of the trend compared to the price at the end of the move. When focusing on the most recent move we have seen an increase of over 500%! Chart 1 below illustrates the bullish ranges of copper as percentages.
Chart 1 – Quarterly Copper (HG-SpotV) Bar Chart
click chart for more detailTaking advantage of these fast moving copper prices can be done in a number of ways. One of the increasingly popular choices has been to use CFDs on commodities. Trading CFDs is a lot easier than you might think. Alternatively, there are always traditional futures and options contracts traded through the NYMEX exchange.
If trading the actual commodity is a little above your league right now, then trading a copper based stock may be a more suitable alternative. This approach would probably encounter less volatile price movements and may be more in line with your current trading plan. If you are going to trade a commodity-based stock, always remember to compare the long term price charts of both the stock and its commodity to ensure they are correlated, i.e. that their prices generally move together.
Chart 2 below shows the price of copper futures overlayed with the large US miner Phelps Dodge (PD on NYSE). Phelps Dodge has heavy exposure to the copper market and consequently its price generally moves in the same direction as copper. This example has sufficient correlation to warrant further analysis.
Chart 2 – Copper Prices vs Phelps Dodge (PD) Weekly Bar Chart
click chart for more detailWhether you trade using Gann techniques, Elliott methodology or Fundamental analysis, the copper market has had, and continues to have, a bullish setup.
A simple but effective bullish observation of the copper market indicates that an extremely strong trend is in place. The bullish pattern is indicated by moves higher, often for 6 or more consecutive days, while pullbacks generally only last between 1 to 3 days. When copper has retraced, support has been found at the 50% levels (Gann’s number) or 38.2% (Fibonacci number). Going forward, these are key retracement areas to watch to help time your entry. Watch out for some strong buying opportunities on the dips, then apply this back to your copper stock of choice and golden times may come your way in the form of profitable trades.
Good Trading
Aaron Lynch