By John Winston
Over the past 5 months the markets that crashed have staged a significant comeback. While the stock market usually grabs the headlines, there have been some great commodity runs as well.

As the season’s change, the demands for commodities vary according to each respective market. For instance, let’s take a look at copper. One of the more prolonged downtrends on the copper chart shows that from September to the middle of October, copper is usually weak. We can see the demand PHASE of this commodity is the December to April time frame.

Now let’s look at how copper has performed in relation to this chart. Shown below, the price chart of copper shows that a rally formed from December thru April right on time. In fact we can see how April’s high was in a very tight range, bouncing off the $4 dollar area each and every week in April. Interestingly, look at the seasonal chart. Notice how it also has a tight range for most of April. Sometimes price plays out exactly as it should, and other times, it’s a bit harder to see. Although there was a spike high in May, on a closing basis April provided the high and the correction lasted until the beginning of June before rallying to July. So far so good and a very accurate price comparison was in play. And then the meltdown of 2008 began.

Just like every other commodity and financial instrument, the price of copper collapsed. Instead of moving sideways over the summer and providing a September peak, copper began drifting lower into August. But the rally into September never appeared. If you look on the chart you can see August wend sideways and as soon as September arrived, the market drifted lower fighting to stay above $3 dollars. With the seasonal kicking in at around the same time, copper never stood a chance. The bearish factors overwhelmed the metal and the price retreated to $1.25 by years end.

Now by this time, the UP portion of the seasonal came into effect.

We can see that the December to April time frame of copper strength played out as we rallied right into April and we rallied strong. Here again the pullback was only 5 weeks and price began moving up again. In retrospect, a May high was indicative of strength as price rallied. Finally the June pullback came into effect and prices retreated to a June low. So rather than correct down from May to June, copper was so strong that it’s retreat only started in June and then corrected to the seasonal low into July. Again, this was a sign that copper was still very strong.

What next?

Copper is arriving at the point of the year in which weakness usually sets in. If we look at the seasonal chart it indicates that on average, copper peaks around the first week of September and barring a few short cover rallies, usually bottoms in December. This ebb and tide has been transpiring on average for the last 40 years so it is good to keep in mind. It is not a guarantee that price will correct. As a matter of fact, when a seasonal inversion happens, the moves are usually violent. But inversions are the exception, not the rule. The rule is that copper usually peaks in price near this time of year. For those who have played this run, it might be a good time to prune a little.

So where and what should we be looking for?

Over the next four weeks, copper should provide us with a peak in price and a pullback into December. It certainly has been powered in some part by the China factor. In fact, the Canadian Dollar really took in on the chin earlier this week on concern with the Shanghai Index as it took a 17% haircut recently. If we keep in mind that this market has doubled since March we see that the pullback although steep, is still within the confines of a rising market. Nevertheless it was enough to rattle the Canadian dollar, which is a great “currency” proxy for the metal and mineral markets. China has been a huge importer of copper. If they take a break here, copper should also.

If copper’s rise slows right here and begins to consolidate, it will suggest that the resistance above the 3 dollar area is still in effect. And look at price. It’s sitting on top of the blue channel line. This will be a tough line to stay above. As long as it does, it is displaying incredible strength and we should stay with it. But a dip back into the channel and then a failure trying to get back above that line (where it becomes resistance) might be a good clue to suggest the seasonal pullback into late fall is taking effect.

Conclusions

The seasonal change coming and the chart resistance would suggest that an interim peak in copper should be developing over the next four weeks in the price area of $2.95 to $3.35. From there, we would look for a pullback to the bottom of the blue channel line around the $2.25 – 2.50 area sometime late in the fall or very early winter would be the seasonal tendency for this metal.

Courtesy: technicalcommoditytrader.com