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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.

How Far the Decline Should Extend

If the triangle idea works, how far should the next downward move extend? Again, Fibonacci ratios are very handy in calculating the most likely price targets. Wave 'C' should be measured at starting wherever the final wave 'e' of the triangle ends. In the chart below, we assume wave 'e' will end at the 3.749 price level, although that is yet uncertain.

Using the end of wave 'e' as the starting point, it is common for the 'C' wave coming out of a triangle to extend either 61.8% as far as the 'A' wave that preceded the triangle, or to extend a distance equal to the earlier 'A' wave (i.e. 100% of it). If the ideal scenario plays out in copper, the most likely downward price targets would be near 2.6819 and 2.0220.

Because it is very clear where our scenario would be invalidated (if the supposed wave 'e' of the triangle goes higher than wave 'c'), our risk in entering a trade in the metal are clearly defined and relatively small compared to the potential reward. Also, as we indicated earlier, the success of the trade may also confirm other expectations for stocks and currencies. A thrust down in copper, when and if it occurs, will likely be accompanied by weakness in many stock indices worldwide and will probably also coincide with renewed strength in the US dollar.
No positions in stocks mentioned.
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