BASE METALS ETF FORMS REVERSAL PATTERN -- ZINC AND COPPER PART WAYS -- COULD ALUMINUM BREAK THE STALEMATE WITHIN DBB? -- DJ ALUMINUM INDEX HITS NEW HIGH -- ALCOA BREAKS CONSOLIDATION BOUNDARY -- CENTURY, CONSTELLIUM AND KAISER TREND HIGHER
BASE METALS ETF FORMS REVERSAL PATTERN... Video will be posted soon. The Base Metals ETF (DBB) continues to challenge resistance as an inverse head-and-shoulders pattern takes shape. I featured DBB last week and showed the strong correlation to copper. Today, I would like to expand on DBB by looking at aluminum and zinc as well. Note that DBB consists of relatively equal parts of copper, aluminum and zinc. Chart 1 shows DBB with an inverse head-and-shoulders forming over the last four to five months. This bullish reversal pattern would be confirmed with a break above neckline resistance. The ETF is currently challenging resistance in the 16.4-16.6 area, which can be considered neckline resistance. Also notice that the falling 200-day moving average and February-April highs mark resistance here. A breakout at 16.6 would validate the head-and-shoulders and target a move to the 17.5 area. The height of the pattern is added to the neckline breakout for an upside target.
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Chart 1
ZINC AND COPPER PART WAYS... A breakout in DBB depends on strength in two of the three holdings. Let's look at zinc and copper first. Note that the charts for zinc and aluminum were created with a user-defined index, which requires a StockCharts Pro account. According to the International Zinc Association (zinc.org), 58% of zinc is used to galvanize steel, a process that protects against corrosion. Chart 2 shows zinc in an uptrend after the breakout in December. Notice how the metal broke above the resistance zone in the 1925-1950 area and this zone turned into support with two successful tests this year. Zinc is currently near its prior highs and shows more strength than weakness.
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Chart 2
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Chart 3
Chart 3 shows Spot Copper ($COPPER) within a long-term downtrend. According to geology.com, 45% of US copper is used in building/construction and 23% for electronic products. Copper broke down in February-March and plunged to new lows. The subsequent rebound retraced 50-62% of the prior decline and the metal broke trend line support with a sharp decline last week. This decline reinforces resistance in the 3.18 area. A break above the May highs and blue trend line is needed to reverse the downtrend in copper. Those looking for a level can watch 3.25 for a trend reversing breakout.
COULD ALUMINUM BREAK THE STALEMATE WITHIN DBB?... Copper is in a clear downtrend and zinc is in an uptrend, which leaves aluminum to break the tie within DBB. On the demand side, Ford recently built an F150 truck with aluminum and further adoption within the auto industry could increase global demand. On the supply side, note that Chinese output continues to increase and this means more global supply. Throw in some questionable warehousing issues, and the supply-demand picture for industrials metals is muddled even further. This is why we should focus mostly on the chart because all supply-demand issues are built into the price.
Chart 4 shows Spot Aluminum hitting a new low in early February and then breaking above first resistance in early April. The metal then hit resistance near the August-October highs (1850-1880) and fell back in May. With another surge above 1800, a higher low formed and aluminum could be poised for a major breakout. The breakout in late April was medium-term bullish and a break above the 1850-1880 resistance zone would be long-term bullish. Such a move would break the tie in DBB and be very positive for this ETF. Chart 5 shows the Aluminum ETN (JJU) forming a higher low in mid May and moving above its 200-day moving average again.
Chart 4
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Chart 5
DJ ALUMINUM INDEX HITS NEW HIGH... Aluminum-related stocks are quite strong as the DJ US Aluminum Index (DJUSAL) hit a 52-week high in June. Chart 6 shows monthly candlesticks over the last ten years for some perspective. The index broke down in 2008 with a plunge from the 380 area to the low 40s. After a rubber band rebound to the 150 area, the index fell back to the 75 area and formed a long consolidation (base). The base breakout in late 2013 is long-term bullish with the first target in the 150 area. The upper channel trend line marks a second target north of 250. Keep in mind that this is a LONG TERM target that is subject to change. Chart 7 shows a strong uptrend from October to June. Broken resistance and the May lows combine to mark first support in the 108-110 area.
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Chart 6
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Chart 7
ALCOA BREAKS CONSOLIDATION BOUNDARY... Alcoa (AA), also known as the Aluminum Company of America, is the 800-pound gorilla in the aluminum index because the stock has a market cap of $16.82 billion, which is much higher than its peers. Chart 8 shows Alcoa trading in the upper 30s in the first quarter of 2007 and then dipping below 5 briefly in March 2009. More recently, the stock formed a large base throughout 2012 and into 2013. The base ended with a high volume breakout in October and a move to new highs soon thereafter. John Murphy noted the upturn in his Market Message on December 28th, 2013. Based on this monthly chart, the 2010-2011 highs mark the next resistance zone is in the 17.5 area. Longer term, it is possible that AA moves to the upper trend line of a large rising channel, which would put it in the upper 20s. Chart 9 shows weekly candlesticks with the stock breaking consolidation resistance and forging another 52-week high.
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Chart 8
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Chart 9
CENTURY, CONSTELLIUM AND KAISER TREND HIGHER... The next charts show three other aluminum stocks for reference. Century Aluminum (CENX) has a market cap of $1.32 billion and broke above its May highs last week. Constellium (CSTM) has a market cap of $3.23 billion and started trading in May 2013. Kaiser Aluminum (KALU) has a market cap of $1.2 billion and recently bounced off support from the January-February lows.
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Chart 10
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Chart 11
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Chart 12
ALUMINUM COMPANY OF CHINA HITS KEY RETRACEMENT... Aluminum Company of China (ACH) has a market cap of $4.9 billion and sports an interesting setup on the price chart. Chart 13 shows the stock surging off support in March-April and then falling back with a 62% retracement. The stock firmed in the 9 area over the last five weeks and I would watch this five week range for the next directional signal. A break above 9.3 would be bullish and argue for a move above the April high. A support break at 8.8 would be bearish.
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Chart 13
HOME CONSTRUCTION ISHARES EXTENDS ON BREAKOUT... Stocks continued strong on Monday with the Russell MicroCap iShares and Russell 2000 ETF picking up where they left off on Friday. Both were up more than 1% around midday. Money is also moving into economically sensitive groups with the Home Construction iShares (ITB) extending its breakout and the Retail SPDR (XRT) challenging a key trend line. Chart 14 shows ITB exceeding resistance in late May and then consolidating with a small wedge. This consolidation clearly ended with a three day surge towards 25. I would now use the consolidation lows and trend line break to mark support in the 23.5-24 area. ITB is clearly in bull mode as long as this zone holds. Chart 15 shows XRT breaking above its May highs and challenging the November trend line for the fourth time.
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Chart 14
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Chart 15
THREE BUILDING-RELATED STOCKS WITH BREAKOUTS ... Homebuilders and building related stocks are on the move today. In particular, chart 16 shows Armstrong World Industries (AWI) with a break above the resistance zone from the April-May highs.
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Chart 16
Chart 17 shows Owens Corning (OC) finding support near the 62% retracement in mid May and advancing to the wedge resistance in late May. The stock stalled for a week or so and then broke out over the last two days.
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Chart 17
Chart 18 shows US Gypsum (USG) with a classic setup as well. The stock hit a new high in late February and then retraced around 62% of the prior advance with a falling channel. The retracement and pattern are typical for corrections within larger uptrend. USG broke resistance today with a surge above the May highs and this signals a continuation of the bigger uptrend.
