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A Developing Trade in Copper Might Confirm Bearish View of Equities


The copper market is offering signals about where price will go during the next two years and what the surrounding economy is likely to do during the same period.

Where the Decline Should Start

Next, we can do some tests to see whether the hypothetical triangle is behaving as a triangle should. Typically a triangle consists of five moves, which we label with the letters 'a' through 'e.' Each leg of the triangle is usually smaller than the one preceding it, and the ideal proportion of each leg to the previous one is somewhere between 61.8% and 78.6%. (Another common retracement value is 76.4%, which is very close to 78.6%.) So far, each leg of the hypothetical triangle in copper has ended somewhere close to the 78.6% retracement of the previous leg – a nearly ideal triangle pattern. All of the retracement percentages mentioned here are based on Fibonacci ratios.

Each leg of the triangle should consist of three smaller moves, although they do not all have to be of the same size. On inspection, each of the first three legs ('a', 'b', and 'c') of the triangle appears to consist of three smaller moves. We think leg 'd' also consists of three smaller moves, although it is difficult to see on a weekly candle chart. That leaves us with wave 'e', which doesn't yet look as though it has completed three smaller moves. Wave 'e' also has not yet reached the same retracement values that the previous waves achieved, although it wouldn't break any rules for wave 'e' to be shorter than the others. In fact, 'e' waves of triangles are sometimes quite difficult to predict. They can extend farther than expected, or they can stop short of the target. In this case, the 'e' wave might already be finished, or it might need to complete one more leg up into one of the higher retracement values shown on the chart.

Wave 'e' of the triangle has already reached the 61.8% retrace at price level 3.686. If it continues onward, the price targets at the 76.4% and 78.6% retracement levels are 3.749 and 3.758 respectively. It could also push a little bit higher than that, as long as it doesn't go higher than the top of wave 'c'. A clear sign of the triangle idea being wrong would come from price exceeding the high labeled as 'c' of the triangle (at 3.8525 based on continuous contract futures price data). If that were to happen, then the whole Elliott Wave pattern and trade setup should be reevaluated.

When the Decline Should Begin

It is also possible to predict the most likely dates for the final 'e' wave of the triangle to end. Counting the number of weeks between turns, we see that 35 weeks elapsed from the week when the triangle began to the week when wave 'b' reached its lowest point. Measuring the time between the next lows, 22 weeks elapsed between the 'b' wave low and the 'd' wave low. The ratio of 22 to 35 is 63%, which is close to the ideal 61.8% relationship.

If we apply the same principle to the high points of the triangle, wave 'e' should complete sometime near the date that represents 61.8% of the 32 weeks that elapsed between high 'a' and high 'c'. That would put the completion of wave 'e' around the week ending February 8, 2013. Another common time ratio is 75%, which would put the end date closer to the week ending March 8. We might consider that a "longest case" scenario for wave 'e'. To solve for some of the earliest possible times for a turn, we can use 38.2% and 50% which result in possible turns around the weeks of December 14, 2012 and January 11, 2013.
No positions in stocks mentioned.

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