Dr Copper: False Breakout On False Hopes?

Some market analysts have noted a breakout on copper's daily chart. As this metal is a phenomenal indicator of booms and busts, let's have a closer look.

First, here are some important notes on Copper:

• Copper is widely used in construction and manufacturing. The electrical wiring in almost every building and appliance is made of copper.

• China is the world's largest copper consumer.

• Copper is often used as an early recession indicator, as its place in the production line is about as close as one can get to the beginning.

This diagram highlights the price trend of copper from the start of the year. Observe the extended, yellow trend line above, which was shaped by copper's consistent inability to preserve its trading range. In January, April, and recently in June, the price has declined from the downward trend line. This seemed like a relentless downward trend until there was a recent breakthrough in price on the daily candlestick chart, denoted by a yellow circle.

There are two potential problems with this breakout which could invalidate any current hype of a recovery:

1. The four hour chart (each candlestick closes at 4 hours, rather than one day). This chart establishes the descending trend line much higher and shows that the recent spike has come nowhere close to a retest. With breakouts, it is ideal to see the smaller timeframes breaking out first, and the larger timeframes confirming the trend. In this case, it looks more like a mixed bag.

2. The spike upward and rejection back down were at least partly fuelled by China's central bank. Weak manufacturing data from China (and the rest of the world) has been a major reason for the downward trend in Copper's price. This could be telling in itself, as copper relies on manufacturing. One of the things that analysts were hopeful for last week was China's inflation data forcing the hand of the PBoC to take more measures in easing. This led to a brief rally which was squashed by the PBoC's decision to do nothing. This means traders put too much hope on the central bank being willing or able to override the bad manufacturing data that weighed on copper's price.

Jobless claims out of the USA are coming out at 10:30PM (AEST) and could provide the next nudge up or down for copper. One reason is obviously that copper is priced in USD, and the other is on the back of copper's connection to recession traders. Employment data from the USA could be used to further validate those banking on a double-dip recession, with copper leading the way and risk markets eventually following. In this case, traditional hedges, such as gold and silver, could be vehicles for those fleeing uncertainty.