Is Dr. Copper About to Make a Diagnosis?
The copper price is reputed to have a "Ph.D. in economics" because of its ability to predict turning points in the global economy. That role is justified due to copper's widespread use in most sectors of the economy, from homes and factories to electronics, power generation and transmission demand. For this reason, copper is often viewed as a reliable leading indicator of global economic health.
Chart 1 shows that major swings in the copper price are closely related to those for the commodity asset class as a whole, in the form of the CRB Composite. It follows that a good understanding of where the copper price might be headed will also provide a clue for the likely direction that commodities in general will take. Bearing that in mind, let's take a closer look at copper's technical position.
Chart 2 compares copper to a price oscillator comparing a 6-month to a 15-month EMA. A reading of zero tells us that both EMAs are at the same level; the green shadings tell when the shorter-term 6-month series is above its 15-month counterpart. The red ellipses reflect false or whipsaw signals. There are only five of them and they were all on the buy side. A whipsaw every 50 years is not perfect, but not bad for a very volatile commodity. Right now, the indicator is losing ground, but is some ways from a sell signal and therefore still bullish. So far, so good.
Copper's long-term KST is featured in Chart 3. In this instance, the green shadings tell us when the indicator is above its 9-month MA. This approach captures most of the advances and avoids all the serious declines that have taken place since 1972. It's also still bullish. However, you can also see that the KST has begun to ever-so-slightly roll over and get perilously close to that moving average. Adding to the suspense is the fact that the price itself ($4.28) is barely above its 12-month MA at $4.25. Crossovers of the average have had a mixed record since the 1970s, as they have been fraught with false signals in both directions. In the last 10 years, though, the average has behaved quite well. However, if a negative crossover is experienced in conjunction with a bearish KST, the potential for a valid signal is enhanced.
Chart 4 pits the copper price against its Special K indicator (SPK), which you can read about here. When it is possible to construct trendlines for both series, which are then jointly violated, major changes are usually in store for the copper price itself. Another useful technique is to spot positive and negative signal line crossovers by the SPK. If they occur in conjunction with an SPK trendline break, so much the better. Recently, both series have been in a trading range, but, for the SPK, this has materialized at a relatively high level.
Chart 5 uses the same approach, but with the focus on a more recent price action. We have already seen from Chart 4 that both the price and SPK had violated their 2020-2021 up trendlines, thereby indicating a loss of upside momentum. Now they have to battle with those 2021 trading ranges. In the case of the SPK, we see that a negative signal line crossover has already taken place, as has a drop below the neckline of a head-and-shoulders top. Such action looks ominous, especially given the extended nature of the trading range. However, Charts 1 and 2 are still bullish and the price remains above the lower area of the 2021 trading range at $4.10. If it can regain its composure and rally above the upper part at $4.80, that would be positive, as it would ward off a sell signal by the long-term KST and probably result in a high risk buy. That said, it needs to perk up pretty quickly, as otherwise the negative action of the SPK will likely pressure the price to drop below that magic $4 level.
Returning back to the relationship between copper and the CRB Composite, our final chart shows that, except for the unusually strong 2001-2008 bull market and the temporary 1989 bounce, long-term copper KST sell signals have generally proved to be a timely warning for commodities in general. Consequently, it's worth monitoring that trading range for copper very closely, as the good doctor may be about to reveal his diagnosis!
Remember, you can always update these charts going forward simply by clicking on them.
Good luck and good charting,
Martin J. Pring
The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Groupof Walnut Creek or its affiliates.
