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Calculating When to Cash In on Copper


The price broke as expected and should continue declining.

Last December, in our firm's first article at Minyanville, we presented the bearish scenario we were forecasting for copper. A few months later, when prices seemed on the verge of breaking downward out of their consolidation range, our firm posted an update confirming that the market was behaving as expected, and offering some preliminary price targets. We mention the previous articles here, because we believe they are helpful in showing the reader how a trade develops, as well as the distinction between the time when a potential trade is first identified and the time when an entry becomes more favorable. Now, we attempt to identify where the trade might reach fruition.

Recall that the December article made the case for viewing the present move downward from the 2011 high as being the third segment of a larger corrective structure and as being the counterpart to the large downward move of 2008. The monthly candle chart, below, shows a comparison of the decline in 2008 and the one currently unfolding. The first and third segments of a corrective pattern should be of similar magnitudes, and the size of the two moves often reflects a Fibonacci ratio.

copper chart

Comparing the move in 2008 against the present decline that began in 2011, typical Fibonacci ratios suggest lower targets of 2.96, where the present decline would equal 61.8% of the 2008 move, and 1.81, where the present decline would equal the entire 2008 move. We believe the 61.8% level probably will break, but it can nevertheless introduce a "speed bump" to the decline. Watch for at least a pause at that level.

The monthly candle chart also shows how the 16-month consolidation pattern behaved nicely as a triangle, which broke to the downside as expected. The presence of a distinct triangle as the second part of the decline allows for calculation of another set of targets – ones based on comparing the part of the move that occurred before the triangle to the part that is occurring now. These comparisons can be seen on the weekly candle chart, below.

Measurements of the move coming out of an Elliott wave triangle should always begin at the tip of the last leg of the triangle (the 'e' wave). In comparison to the first part of the decline from the 2011 high, the present move out of the triangle will have a 61.8% relationship when price is at 2.74. The two moves would be equal when price is around 2.09. Thus, the weekly chart and the analysis of the internal structure of the present decline offer a different set of targets than the monthly chart. Expect the market to respond in some degree to all of the levels. From this point, diligent examination of the structure of the decline in 2013 can help identify when the move is nearing completion. As we noted earlier, we think it has farther to fall.

This article originally appeared on Trading on the Mark.
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