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Copper Provides Classic Trend Trade


May copper futures (HG) rallied from a low of 1.944 in January to a recent high of 2.3235 on March 18. Throughout March minor support developed at 2.2035. Based on the longer-term downtrend, sellers were watching for a break below support to signal another move down. As of the April 5, the price is falling; there were a two great ways to get into this short trade.

With the expectation down, one possible short entry was to wait for the price to drop below 2.2035. A stop loss is placed just above 2.3235. A more advanced entry was to notice the false breakout to the upside on March 18. The price tried to rally above the March 4 high of 2.304, but quickly stalled out and moved sideways for a few sessions. The low of those sideways days was 2.27; a drop below signaled another down move may be coming. The entry was just below 2.27, with a stop loss just above 2.3235. The latter method provides in a much great reward and smaller stop loss.

A potential downside target is 2.04, which is where this most recent rally started from.  The next target is 1.96, just above the 1.944 low. More aggressive traders expecting the price to make a new low will be placing targets below 1.944.

Figure 1. May Copper Futures, Daily Chart

The wind is in the favor of the bears currently (from a longer-term perspective), but a rally back above 2.3235 sets the stage for a potential trend reversal.

A break above 2.3235 isn't necessarily a buy signal, but if the price can move into the 2.4 region it will have erased all the losses seen in the late-2015 and early-2016 drop. That is a bullish sign. If that occurs, the buying opportunity comes on a pullback, likely into the 2.2 region. Therefore, a move higher provides analytical insight as opposed to a trading opportunity, since right now buying into a downtrend isn't advised.

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