If Copper is the Tell What is it Telling Us? Ummm, IDK?

To answer this first let’s look at whether Copper is really a market tell. Below is a ratio chart of Copper to the S&P 500 Index on a weekly basis since 1997. Notice that since early 2007 there has been a pretty good correlation between the two. This correlation also held up well for 2003 until August 2006. But prior to that there was a a 6 year stretch where Copper seemed to drift while the S&P 500 was steadily moving higher and then a brief period in late 2006 where thy moved in opposite directions. So is it a good tell for the market direction? The answer is yes, when it is working and no when it is not.

Ok, so I sound like one of those two handed economists. Let’s say it is working now, and so will continue, what does it tell us about the future of the S&P 500? Let’s focus in on Copper itself, looking at the Copper ETF JJC. Below is a weekly chart for JJC since it’s creation over 3 years ago. From it you can see that JJC went through a corrective phase and has now retraced that down move and more. The Elliott Wave notation details this further with a a-b-c wave down, followed by a motive wave higher to the end of 2009, followed by an other sideways corrective wave and then the most recent Super Cycle Wave (III) higher, marked with a V?, to indicate it is not certain yet that the wave has ended. The Fibonacci retracement levels show that JJC is tangling with a 100% retracement of the down move. The trend is definitely higher as indicated by the rising Simple Moving Averages (SMA), but there are some additional conflicting indicators. The Relative Strength Index (RSI) is falling back toward the mid line and the Moving Average Convergence Divergence (MACD) indicator is decreasing and about to cross lower. So maybe it is topping and an indicator of a coming correction. But let’s take a longer view of Copper prices.

The weekly chart below for Copper from 2001 shows a slightly different picture. Notice that the piece that was missing from the JJC chart on the left side changes the view significantly. Instead of being at the end of wave (III), the wave rules require a move much higher to complete only the 3rd wave of the 5 wave motive higher. In layman’s terms, from an Elliot Wave perspective this move is just getting started. It is also interesting to note that the commodity is not tangled with the 100% retracement of the up move but well above it. It could pullback and retest that level without changing things. This brings up a good point. When using commodities as market indicators the purer the better. The Copper ETF, JJC is good for a short term trade, but has noise in it from management and custody fees. Stick to Copper itself. So if Copper is going higher, does that mean the S&P 500 still has a long way to run? Maybe, or maybe the two disconnect again.

Don’t like that answer or think that Elliot Wave is hokus pocus? The Point and Figure chart for Copper below is also indecisive. It does show a bullish price objective of 548 on the 3 box reversal with a 4 point box size, well above the current level. But it also shows a high pole warning, meaning it has retraced an extended move higher by more than 50%. The 548 target will remain in place until the box at 420 is filled, creating a reversal. Whatever method of inter-market technical analysis you use with Copper it suggests a time to pay closer attention. But you already knew that from watching the S&P 500 directly. Hmmm.

(As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

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