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Jason Haver: Copper, USDJPY, and SPX -- An Overview of Three Important Markets


Copper has broken down from key support; does this have implications for US equities?

Lately, more and more signals have been nudging their way into "sell" territory, while the market has continued to grind sideways/down. Last update I mentioned that a break of 1870 would suggest a first target of 1865, and that target was captured on Tuesday. The second target of 1860-62 now appears probable -- and I'll discuss another short-term inflection point when we get to the S&P 500 (INDEXSP:.INX) chart. Let's look at two other charts first, though.

One has to dig pretty deep into the archives, but it's a matter of public record that I've been bearish on copper since November 2011. Copper has been hit hard recently as concerns continue to mount over China's troubles, and prices have now hit multi-year lows. Copper is generally correlated with economic growth since it's used in construction and for electrical and communications wiring, but, historically, copper prices haven't always correlated terribly well with US equities. In fact, copper fell steadily from 1995 through 1999, losing more than half its value during one of the greatest bull runs in equities history.

There are numerous reasons why copper may be getting hit hard at the moment, and China seems to be at the core of several of them. China accounts for about 40% of the world's copper consumption, and last week China reported the biggest drop in exports in four and a half years. So, fundamentally, there are continuing signs of economic slowdown from the world's largest copper consumer. Some of the price drop in copper also appears related to the weaker yuan (China's currency), which makes purchasing copper more expensive for China. And some of the price drop seems due to the fact that copper is used as collateral for loans in China: The recent weakness in copper hit at the same moment as China's first domestic bond default (Chaori Solar).

Copper now appears to be breaking down from key price support. Looking at copper's price chart, we can see that potential exists for (ultimately) a trip back toward the 2008 lows:

Click to enlarge

Let's take a look at a market I continue to feel is important as a correlated market for US equities: the US dollar/Japanese yen currency pair. Equities bulls would like to see strength in this market, but so far, USDJPY has only formed a good-looking ABC corrective rally to the last large decline. While I haven't annotated a wave count on this chart, I have highlighted the zones which appear to be key support. My instinct is that bulls probably don't want to see USDJPY sustain trade below 102.600ish -- though, technically there are a couple last-ditch support areas below that price zone (shown as the yellow and white trend lines).

Click to enlarge

Finally, SPX has been grinding sideways/down for the past several sessions, and while it took the long way around, it nonetheless captured Monday's downside target on Tuesday. The second target of 1857-62 appears probable, and Tuesday's wave structure has also given rise to a new near-term inflection zone at 1854-56.

Click to enlarge

If you're a new reader, you might need to read all the boxed annotations on the above chart to make sense of it. In conclusion, the super-short version is that the market reached an inflection zone last week, and the outlook maintains a slight bearish bias as long as price remains below 1895. In the event SPX sustains trade north of 1895, then the outlook shifts 180 degrees the other direction, with 100+ points of upside possible.
As yet there have still been no significant breaks in either direction. However, in the event of a sustained breakdown, there is now some coiled bearish potential energy in the charts. Bulls will need to recover any lost key zones quickly if they wish to create a springboard, or risk an accelerating decline. Trade safe.

Follow me on Twitter while I try to figure out exactly how to make practical use of Twitter: @PretzelLogic.

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