Tuesday, May 10, 2011
The breakdown in copper last week is a bad sign for stock prices.
Copper and the S&P 500 have been trading in tandem for the past few years. In fact, the price of copper seems to lead stock prices by about two weeks. Traders can use the action in copper to gauge buy and sell signals for stocks.
I wrote about this relationship several weeks ago. Back then, the S&P 500 had just suffered a sharp correction. But copper was bouncing off its lows. That was a good indication the stock market correction had run its course. Here's what I wrote at the time...
If you want to know where stocks are headed next, keep an eye on the chart of copper. Right now, copper's bumping into resistance near 440. If it breaks above that level, it should be able to challenge its February highs, and stocks should continue to rally.
On the other hand, if resistance holds, support at 420 becomes the critical level. But if copper fails to hold at support, the rally in stocks should fail as well.
Copper didn't hold up. It broke below critical support at 420 and is now resting on secondary support near 400. Take a look at this updated chart...
This is a bad sign for stocks. With copper now trading below its March-correction low, the S&P is likely to follow suit.
In other words, last week's selloff in stocks isn't just a one- or two-day affair. It's probably the start of a several-week correction that should push the S&P 500 below its March low of 1,254. Based on the following chart, 1,225 looks like a reasonable downside target...
Stocks have bounced a bit over the past couple days. And there may be a little more upside to the bounce – if only to work off the oversold condition created by last week's decline. But unless copper rallies hard immediately, traders should sell stocks into any strength and use this as an opportunity to add short-side exposure.
It looks like there's more downside ahead for the stock market.
Best regards and good trading,
"Copper just 'broke the box,'" Brian Hunt says about copper's recent move lower. "This could be a temporary setback. But at the very least, it's a 'punch in the gut' for the commodities uptrend... one that will take months to recover from." See the chart that proves it here.
Over two months ago, Jeff forecast a top in copper and a subsequent break to the downside. If you bet on a fall when he did, you could have prevented a 10% loss on your investment.
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