A Blow-Off Top in Copper? Consider These Charts

The rally in copper this month has been impressive, with the metal up over 23% in just nine trading days. But a long upper shadow candle formed in Friday's session. It may be a sign of a temporary top.

On the weekly chart of the continuous contract, the year-to-date price action can be seen forming a symmetrical triangle pattern, with this month's price action breaking through triangle resistance, then moving sharply higher and piercing a nearly five-year downtrend line.

The weekly candle close, however, took the price of the metal from its high of the period back down to finish right on the long-term downtrend line.

The daily chart highlights the triangle pattern breakout and the subsequent brief penetration of the long-term downtrend line, which formed a shooting star candle. The shooting star has a long upper shadow with a narrow opening and closing range situated at the lower end of its overall range. It reflects early buying interest that is followed by profit taking and short selling, and can signal a blow-off top when it forms after a sharp rally in price and is accompanied by a sharp increase in overall volume.

Overall volume did spike this week, with the largest move coming in Friday's negative money flow session.

The commodity channel index at the top of the chart can be used to identify early shifts in trends or warn of extreme conditions. It is an overbought area. The money flow index, a volume-weighted relative strength measure, is also in its overbought zone.

All candle or candle formations require confirmation in the form of follow-through price action. The validity of the blow-off top scenario will be determined in the coming days. The parabolic price action and the sharp pullback, however, reflect an instability that could lead to a further decline.

This may, in fact, be a positive development, as a reversal in the prior long term downtrend is not likely to be "V" shaped, and should require an extended period of base building.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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