How last week’s important price action affected the short-term picture?
Let’s start todays analyze of copper with the medium-term chart.
Looking at the weekly chart, we see that after many weeks in the downtrend the bulls managed to push the price of copper not only above the previously broken 200-week moving average, but also above the upper line of the red declining trend channel (marked with dashed lines), which opened the way to higher levels.
As you see, the price jumped above the channel at the end of November, creating a green gap (3.789-3.829), which encouraged the buyers to go even higher. Thanks to their action, copper climbed not only above the 50-week moving average, but also above the Aug. 28 peak of 3.909). Despite these positive signs, the bulls didn’t manage to hold gained levels, which triggered a pullback, which took the price to the previously broken upper line of the channel.
In this way, copper verified the earlier breakout (not only above the channel, but also above the 200-week moving average), which in combination with the strength of the green gap encouraged the bulls to come back on the trading floor.
As a result, the price extended earlier upward move and climbed to a fresh multi-month high of 3.974 earlier this week, but will we see further improvement?
If we take a closer look at this chart, we can see a couple of worrying factors that could interfere with the bulls' pro-growth plans.
What do I mean?
Firstly, copper moved to the resistance area created by the June and July peaks (3.967-4.024).
Secondly, the volume which accompanied recent increases was falling week by week, which definitely doesn't confirm the strength of the bulls.
Thirdly, the CCI and the Stochastic Oscillator moved to their overbought areas, increasing the probability of sell signals in the coming week(s). Although this is not yet a very negative sign, we must remember that such high readings of indicators we could observe at the beginning of this year. What happened then? In the same month, a multi-month correction of previous increases began, which raises the risk that we may see a similar situation at the beginning of next year (as history likes to repeat itself).
Will the short-term chart bring the bulls better news and allies to support them as they continue their march north? Let’s examine the daily chart to find out.
The first thing that catches my eye on the above chart is an invalidation of the earlier breakout above the Dec. 1st peak of 3.933 and the 50% Fibonacci retracement (based on the entire earlier downward move started at the beginning of the year) during yesterday’s session, which doesn’t bode well for further improvement.
Additionally, copper moved to the area of a huge bearish engulfing candlestick pattern formed on Aug. 1st (marked with the black eclipse), which serves as very important resistance (and reinforces the strength of the 61.8% Fibonacci retracement).
What does it mean?
In my opinion, even if the bulls try to push the price a bit higher from current levels, the combination of these two factors will likely encourage the bears to attack. This scenario is additionally supported by the current situation in the indicators.
As you can see, there are negative divergences between the price and all marked indicators, which increases the probability that reversal may be just around the corner. Additionally, the CCI and the Stochastic Oscillator moved to their overbought areas and the latter indicator already generated a sell signal.
How low could copper go?
In my opinion, the first downside target for the sellers would be the green dashed rising support line (currently at around 3.875), but if it is broken, the bears will likely test Dec. 19 low of 3.841 or even the green gap (3.788-3.835) formed on Dec. 14, which is also reinforced by the major support seen on the weekly chart – the gap (3.789-3.829) formed at the end of the previous month, which was strong enough to stop declines at the beginning of the month.
Summing up, copper invalidated the earlier breakout above the Dec. 1st peak and the 50% Fibonacci retracement, which in combination with the bearish candlestick formation, the current situation in the indicators (not only daily, but also weekly) and the proximity to the strong resistance area (marked on the medium-term chart) suggests that further deterioration and lower prices are just around the corner.