Old trading wisdom says, "The Trend is your friend." I hope that you also prefer trending markets as it is the clearest action of market unity. I was patiently waiting for the upside move in oil to exhaust itself and see a clear break of the trend with a daily close and the following open to be below that close. And it happened today. So let's think about the coming opportunities.
Chart 1: Copper-Crude Oil Correlation: Gap Closed
Chart courtesy of tradingview.com
Oil finally managed to close the gap with the copper thanks to a very sharp trend amid a flat move in copper. Although copper peaked earlier than oil, the former started down first, as usual. They began to diverge again as oil fell below the blue support line while copper bounced up from its Thursday low. We will see if oil is still an early indicator of the copper move and if will they both hit new bottoms.
I refreshed the daily charts below to show you the recent moves in detail.
Chart 2: Crude Oil Daily: Break Down
Chart courtesy of tradingview.com
Above is the reconstruction of the previous oil chart where the famous double bottom pattern was detected. We can see that the target of $38.36 was successfully hit (highlighted in blue dotted horizontal line).
We know that it has just been a corrective upside move within the major downtrend that's clearly seen on the monthly time frame. The first signal that this move is approaching its completion was when the price couldn't close above the 61.8% Fibonacci retracement level at $41.41 and quickly dropped below the previous high at $38.99. And as I mentioned at the beginning of the post the final confirmation, we received when today's candle opened below the trend.
The minimum target for a new drop is located at the previous low of $26.03. It's a hefty $13 to book in profit.
Chart 3: Copper Inverse Head and Shoulders Pattern
Chart courtesy of tradingview.com
Another popular reversal pattern has been shaped on the copper chart and is highlighted in my previous copper post. The price peaked just two cents off the target of an inverse head and shoulders pattern. The metal like oil, couldn't secure it's grip above the 61.8% Fibonacci level and fell to the previous low area. Despite the huge drop, copper kept its seat within the trend channel lagging behind crude.
Oil is still the top commodity, indicating the future trend and we should see huge copper weakness ahead. The minimum target for the drop is at the previous low of $1.9365 or another thirty cents down. But if we look at the first chart above, we can see that the tight correlation can take copper much lower… at least to the $1.5-1.6 area (-32% from the current level, where the oil's bottom is sitting). This could give us 64-74 cents of profit in total on short trades.
Intelligent trades!
Aibek Burabayev
INO.com Contributor, Metals
Disclosure: This contributor has no positions in any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
Hello Fellas,
I must admit this is an interesting view and very good analysis. Honestly, I'm having the same view when comes to future trend.
However, how what if the copper crosses through the oil as a result of China's PMI results that came out today? Is this indicator strong enough to have significant impact on price of copper and is the oil going to continue in its downward trend?
Mark