Two Market Segments That Look Set for a Big Move

Recently, I have been drawn to two specific-but-unrelated areas of market activity. Both are experiencing an extremely fine balance between buyers and sellers and, as a result, are likely to experience a big move in one direction or the other. These are the copper price and small cap stocks. Let's begin with Dr. Copper.

Copper Rangebound in a Long-Term Overbought Situation

Chart 1 shows the copper price history since 1972 compared to its Special K (SPK) indicator. The SPK, which you can read about in detail here, combines short-, intermediate- and long-term KSTs into a single indicator. Because of that, a jagged series is returned. However, that irregular characteristic means that it more or less peaks and troughs with the security it is monitoring. In fact, it happens about 70% of the time. In the case of the highly cyclical copper price, the arrows demonstrate that this reversal characteristic happened at 14 of the 15 post-1972 cyclical turning points. Note that the chart has been reproduced from a slide inPart II of my IFTA/StockCharts 2022 outlook.Part I of the presentation can be found here.

Of course, it's easy to spot such reversals using the benefit of hindsight, but to be of any use, we need some techniques that can identify reversals at a relatively early stage. Chart 2 shows that one possibility is to observe crossovers of the signal line, which is calculated from a 100-day smoothing of a simple 100-day moving average. Most of the time, this approach works quite well, although, in many instances, the volatility of SPK results in numerous whipsaws. However, we can put that jagged characteristic to good use, as it enables the construction of viable trendlines. When violated, they typically offer reliable indications that the SPK has reversed trend. That happened for the copper price in the summer of last year. At that time, both the price and SPK violated sharp up trendlines. An actual reversal did not take place, but was followed by rangebound activity. However, the SPK completed a small head-and-shoulders and dropped below its signal line. It has now returned to that extended dashed red line and is slightly below the MA and green corrective down trendline. As the chart stands now, things are leaning to the bearish side, but could easily tip in a more bullish direction. That's why I am watching it like a hawk.

This fine balance can be observed in Chart 3, which shows that the Global X Copper Miners ETF (COPX) has maintained last week's upside breakout and is being supported by a bullish short-term KST. This could bode well for the price of the red metal, which is struggling with last week's breakout. Only time will tell.

The real problem being faced by the copper price can be appreciated by returning to  Chart 1. It tells us that the SPK, at its 2021 peak, was overstretched on the upside, as it touched the lower end of the pink copper death zone. The only time the indicator has remained in the zone for a prolonged period and experienced a sharp rally was in 2006-2007. That example has been flagged by the second dashed blue arrow. There was also an instance of slightly higher death zone prices in 1980. Consequently, it is not impossible for copper to rally from here, but the odds do not favor it.

Small Caps Holding at Key Support

False breakouts are typically, but not always, followed by above-average price moves in the opposite direction to the breakout. That phenomenon, I believe, is caused by traders who bought or sold on the breakout either getting back to the right side of the market or merely liquidating their positions. This factor, combined with the "natural" forces that caused the false break in the first place, combine to result in an above-average move. Last fall, the iShares Russell 2,000 ETF (IWM) broke out from its 2021 trading range. Many of us, including myself, thought this was a valid move, but Chart 4 shows that was not to be the case. I have a rule that false breakouts need to be confirmed by additional price weakness or strength, depending on the direction of the move. That confirmation can take the form of a reliable moving average crossover, trendline break, peak trough reversal and so forth.

In the case of the IWM, a negative 200-day MA crossover and two failed attempts at a positive re-cross offered some initial confirmation. Now, the price has tentatively violated its 2021-22 support trendline, a.k.a. the neckline of a large head-and-shoulders pattern.

Chart 5 compares the IWM to its SPK. Note the false breakout that developed in 2020 just prior to an "above-average move" to the downside. The SPK has again traced out a small top, dropped below its signal line and experienced a series of declining peaks and troughs. Seatbelts, anyone?

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.