Gold attracts massive interest all over the planet. Institutional and retail traders, as well as the broad public, follow every wiggle and waggle of the iconic yellow metal. But price action in the copper and silver pits offers more actionable data, because these less emotionally charged metals predict major turns in broad economic activity.
While copper is a well-known proxy for worldwide economic activity, silver often moves in lockstep with gold as a predictor of inflation/deflation, and it reflects current fear levels. More routinely, silver and the world economy are joined at the hip, making silver a valuable "tell" in the debate between the slow-growth and double-dip crowds.
Which of these two outcomes is closer to fruition? After last week's data showed a series of minor upticks, analysts are retreating from worst-care economic scenarios, but I don't think we're out of the woods just yet. Late-summer statistics are hardly instructive on broad economic turns, and it's possible that August's brighter picture will turn considerably darker as we head into the fourth quarter.
I'm particularly concerned with the period that starts after September's triple-witching options expiration on Sept. 17. There are good reasons to believe that hidden hands will keep a floor under the broad market until that date, when late-summer bets finally come off the table, ahead of third-quarter earnings season.
How did copper and silver react to last week's mildly positive economic data? And are these industrial metals telling us that world economies are set to strengthen or weaken as we push past the middle of September and into the seasonally adverse interlude between that time and the key November election?
Copper futures hit an historic high near 417 (that's 4 dollars, 17 cents) in May 2006, a full year ahead of the peak in the commodity bubble that burst during the last bear market. Those futures rolled over at that price level and dropped all the way to 240 in the next seven months, in an early warning sign for a world economic boom that was slowly losing steam.
The brown metal popped back to 380 in the middle of 2007 and spent the next 15 months testing the 2006 peak. It finally lifted into a marginally higher high in May 2008, spiking higher in a one-day wonder that marked the top, ahead of a massive decline that finally ended at 125 in December 2008.
The subsequent recovery hit the 78.6% selloff retracement in April of this year and dropped into a V-shaped pattern that returned price to within 15 points of the high late last week. Overall, this year's price action looks remarkably similar to the 2007-08 sideways market, with price digesting the 2009-10 rally in a broad holding pattern.
This contract has now has moved into a critical price level on the weekly chart, because a renewed downturn could print a lower high that keeps copper within a broad trading range for the next three to five years This isn't too far-fetched, given the likelihood of a relatively weak economic upturn.
Conversely, the next breakout will run into immediate resistance at the 2006 and 2007 highs, which should limit upward progress for many months or even years. In both scenarios, copper's upside is limited while the downside is nearly unlimited, given the lack of deep dips since the 2008 low.
The daily chart shows the possibility of a head-and-shoulders pattern (red lines), if copper turns south right here and heads back toward 300. In addition, note how the June bounce has stalled at the 78.6% selloff retracement (green line) in a small-scale fractal of three-year price action. This is significant, because commodity markets are notorious for this type of repeating behavior.
This perfect positioning as we head into the middle of September provides clarity, because a rally over last week's tweezer top high will negate the head-and-shoulders pattern and set up a key test at the April high. That uptick would place the contract into a more favorable position to break out and rally into a test of the all-time high at 427.
Silver futures rallied strongly with other commodity markets through the middle of the decade, posting a 28-year high at 214 (that's 21 dollars, 40 cents) in March 2008, right at the peak of the metal and energy bubble. The subsequent decline gave up about 78% of the multiyear rally, bottoming out near 84 in November 2008.
Price action since that time shows a steady recovery that ran out of steam in December 2009, giving way to a broad consolidation, with support near 150 and resistance near 200. The deep dip into February of this year, followed by a bounce to resistance and a shallow pullback, has carved the broad outline of an ascending triangle pattern.
Unfortunately, any breakout will run into significant resistance just $1.40 higher, at the 2008 peak. This barrier limits reward potential and tells interested parties that an uptick could turn quickly into a bull trap, with more significant selling pressure entering the market as soon as that higher price level gets hit.
The nine-month pattern looks more like a bearish rising wedge than a bullish triangle on the daily chart. In addition, silver has hit a new 2010 high but still hasn't mounted round-number resistance at 200. This is a tricky situation, because the chart looks a buy at first glance but is flashing enough warning signals to warrant an ounce of caution.
If the contract reverses in the next day or two, it needs to find support at or above the wedge trendline, because a decline into that level would also test the 200-day moving average, as well as the August breakout (blue line). A higher low in that downturn would inspire more confidence in a breakout and push up to the three-year high.
Alternatively, a wedge breakdown could be brutal, dropping silver into a major decline that retraces at least 50% of the recovery that started in 2008. That would favor a downside target well under 150. For now, however, the metal is trading in no man's land, where market players should stand aside and let everyone else risk their capital.
Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.
At the time of publication, Farley had no positions in futures mentioned, although holdings can change at any time.
Alan Farley is a private trader and publisher of
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