Copper gives bearish signal; other commodities not supporting rally
Generally copper leads the equity markets but not this time. If the economy is expanding one would expect demand for materials like copper, oil and aluminum to rise too. However, that does not seem to be the case
Copper, a leading indicator of the equity markets gave a bearish signal this week breaking below a consolidation pattern that began forming in October 2011. Other leading commodities such as oil, gold, silver and aluminum too have not supported the equity rally for a long time.
Generally copper leads the equity markets but not this time. If the economy is expanding one would expect demand for materials like copper, oil and aluminum to rise too. However, that does not seem to be the case with all the three commodities moving in a range, while the equity markets continued to rally. Even gold and silver prices have stayed range bound since September 2011.
Let us quickly take a look at the charts. First we'll look at the combined chart of copper and Nifty (click here for chart). The copper chart is on top and the Nifty below and it shows that the metal was stuck in a consolidation pattern called a symmetrical triangle and the Nifty was in a upward channel.
Nifty did break the rising channel a month back and this week copper broke below its symmetrical triangle. In a symmetrical triangle price moves in a continuously narrowing range to eventually break and move in the direction of the break. Since copper broke below it is likely to continue falling unless prices move back into the triangle.
With copper not supporting the equity rally, Nifty was unable to stay in the upward channel. The US indexes rallying even now and could also be due for a correction given the bearish break of copper.
Let's now look at the combined chart of oil and aluminum. (click here for chart.)The aluminum chart is on the top and the crude oil chart below. Notice that crude oil is in a pattern similar to copper--a symmetrical triangle. While copper broke below its triangle, oil is still inside the pattern. Aluminum too has been moving in a range as shown by the two horizontal lines on the chart.
Finally a look at the combined chart of gold and silver. (click here for chart) The chart on top shows the price action of gold and the one below tracks silver. Again notice that both the precious commodities have been moving a price range fenced in by the horizontal lines.
Given the range bound price movement of commodities and the bearish break of copper one has to ask the question is this rally sustainable. Generally materials and energy picks up near the end of the bull cycle. Energy stocks are already near their peak and began retreating a few days back. So its possible that we are getting ready for a bear market.
The other indicator of a coming bear market is investors rotating into defensive sectors like healthcare, consumer staples and utilities. The health care and consumer staples have continued to rally to new highs globally in 2013. Utilities is still below its pre-recession peak. The fact that healthcare and staples are so strong indicates that the investors are taking a very defensive strategy and not trusting this rally. Now with the break of copper let's see what the market will bring.
In past gold and silver have rallied with the equities have gone up. The rally in the precious metals is generally to hedge against possible inflation. Inflation or inflation expectations tend to push the equity and precious metals markets up. Despite the pumping of money by the western central banks the precious metals have stayed stagnant. All the money seems to be going into equities. If gold and silver are stagnating it most likely signals a slowing or potentially deflating economy.
Long term investors should be taking profits on at least part of their long positions. Traders should continue to buy and sell based on supply and demand levels that we write about often in this column. Note that Nifty hit a gap support level at 5635 on Friday and could rally a bit. If 5635 is broken the next support zone is between 5545 and 5595.
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The Nifty and Sensex have not been making decisive moves. Till they do that, one can't assume the bears are in retreat. But two shares - Eros and Bharat Forge - appear promising from a technical viewpoint.
So while the bulls may me on the defensive right now, the playing field is still skewed in their favor.