October 12, 2009

Gold vs Copper Futures

With everyone staring at the breakout in absolute price regarding Gold, does the performance in the precious metal translate to other markets?

The daily bar chart above compares Gold futures (on the left) with Copper futures (on the right). Blue vertical dashed lines mark significant dates of interest in Gold, and are plotted on both metals charts. Black trend lines are plotted between Oct 08 and Dec 08. On the left chart, a symmetrical triangle is plotted for Gold, with sold blue vertical bars representing the height of the triangle. On the right chart, both a channel (in blue) and a flag (in red) with corresponding vertical bars marking the height of both patterns are plotted for Copper.

The Oct 08 reversal in Gold preceded a recovery in Copper by two months, with the more industrial of the two metals not rebounding until Dec 08. Unlike many other commodities (Copper included), Gold did not suffer the same precipitous fall. While Crude was the most notorious commodity reversal of all in 08, Copper suffered a similar fate. From a longer-term perspective, the sell off in Gold was a mere correction to a several year uptrend in the precious metal. On a percentage basis, the rebound in Copper is impressive - but like Crude, it has yet to eclipse previous highs.

For now, it appears Gold is leading Copper. Having broken old highs, price targets will become more difficult to come by. The symmetrical triangle offers an ideal measurement for the next level in Gold. Taking the height of the triangle, and adding it to the breakout in Sep 09, a target of $1,132 is offered. Technicians looking for a near term time target will find mid Nov 09 aligns with a parallel drawing of the lower leg of the triangle plotted from the apex of the triangle itself near $1,000 in early 09 (not plotted).

Copper, however, offers two possibilities. First, the channel plotted in blue represents a more optimistic value near $3.3237. With the current price action confined to the flag pattern near $2.8560, Copper still has a way to go to break from the $3.0000 level where that target is measured from the potential channel breakout. At a minimum, a long target of $3.1578 is more immediate, and is currently awaiting Copper to breakout from the flag pattern near $2.9000.

If Gold corrects before another advance, Copper could be expected to trade sideways or down to the lower leg of the channel near $2.6000. Should Gold continue unabated in its ascent, the previously detailed targets ($1,132 for Gold, and $3.1578 for Copper) should be expected. Gold has clearly moved ahead of Copper the last 12 calendar months, and technicians would be wise to track the current chart patterns to determine upcoming price targets in each instrument.

Jeffery E. Lay, CMT
President
Talon Eight, LLC

Disclaimer: This post is intended solely to disseminate information, and is not, and shall not be construed to constitute financial, investment or other similar advice. All posted material should be independently verified for accuracy and current applicability. Readers of this post are referred to the Risk Disclosure for further information.

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