The last time we analyzed copper, we were buying at $3.75, anticipating an upside rally to the $4 area. Next day, we were stopped out with a few cents loss, and price has dropped recently to as low as the $3.47 area. Based on the speed of the decline and the heaviest volume along the way down, copper should drop even further, or so one might think.
Past history on a chart is important, but the most important part of all is the present tense developing market activity because it is the culmination of all previous efforts. We take another look at what the market is saying about where it may be headed.
The ultimate question to always ask is, “Why?” Why did the rally/decline stop here? Why was the range so wide/short? Why was volume so heavy/light? After the “Why?” question would be “Who? The latter helps explain the former. As in life, everything in the markets happens for a reason. Let’s see if we can “reason” what is going on.
Reference is made to the wide range bar down back in September 2012. “EDM” stands for Ease of Downward Movement. This tells us that sellers are in control and are totally overwhelming buyers who are getting crushed on the way down. Why did this happen?
If you count back six and seven bars earlier, you see a small retest failure high of the last failed high in April, and those two bars told everyone who cared to observe them that the market was now in the hands of sellers. After those two bars, you next see a three bar rally. Why were the ranges smaller and on less volume? Because demand was weak, and that was a poor response to the selling effort. These clues were in place before the EDM bar in September.
Yes, this is a hindsight analysis, but you need to understand how markets function because they repeat themselves over and over. When you understand past behavior, you can better understand present tense behavior. The opportunity for making a trade, and preferably one that has an edge, always exists in the present tense.
Long story short, instead of continuing lower after the EDM on heavy volume, price went sideways. Why? Who were the sellers on the way down? The public and weak longs. Who were the buyers? The same ones that started the selling back in April and August. What you see was a transfer of risk from weak hands into strong. Controlling influences, aka “smart money,” were doing the buying.
The series of boxes show the initial support, then the first resistance, which not so coincidently stopped at the poor 3 day rally response back in August. Ping-pong back and forth, support then resistance, the boxes get smaller. Why?
As price moves along the RHS, [Right Hand Side] of any trading range, including a contracting one, it is getting ready to move directionally, one way or the other. The forces of supply and demand are more in balance. Balance leads to imbalance. Would it be helpful to know in which direction the next move will be? Here, no need to ask “Why?”
In between the last two boxes is a wide range bar lower with a poor close, and you can see how it occurred on the heaviest volume. Why and who are crucial to know. We said the Who sometimes explains the why. Who was doing the selling, and more importantly, who was doing the buying?
Who was selling? Once again, the public, expecting higher prices, along with other weak longs who could not financially withstand the decline. Who was buying? Controlling influences, once again. Always remember, patterns repeat, over and over, not always in the same fashion, but similarly enough to rhyme. From that rhyme comes reason.
Note how abruptly the decline stopped over the last three weeks. No further downside, and closes have clustered. A clustering of closes is a pause, just before a market moves lower from the preceding momentum, OR, the pause can be stopping action to reverse the activity that has been moving lower.
The market does not always send out invitations to reveal its intent, but there is a lot of logic in HOW price moves and develops over time. Maybe a closer look at a daily chart can add to the logic we attempt to assess?
How a market responds to an obvious move gives important information. In the weekly chart, we discussed how a three-day rally was a poor response to a two-day decline, back in August 2012.
Applying the logic from the weekly analysis, we can conclude that the public and other weak-handed longs were selling with abandon when price cascaded lower with impunity. In just 5 trading days, 3 months of buying effort was erased. Why?
Why? The Who wanted in, but at much lower prices. Note how heavy the volume was. Compare it to the April 2012 volume when sellers, [the Who], were selling whatever buyers could stand, just before price collapsed lower in May. Note the drop in volume. Most of the smart money had already sold at higher levels. Volume then picked up again in late May and early June. Why? The you know Who were back buying in their short positions.
Logic tells us that it was smart money buying on the way down, at the end of February. Volume decreased in March because almost all of the public and weak longs were spent. The response to the waterfall decline has been relatively muted. Why? No more sellers.
If there are no more sellers, what is likely to be the next important move? Demand will be on control, and price will start to rally. The public, just having been taken to the cleaners will not trust the rally, or not be able to buy anymore, and price will rise without much resistance.
That is one possibility. The other is, copper is going much lower, and the response is just a pause before that event. Which way?
Answer: we do not have to know in advance. We do not have to guess, or worse, “predict.” Instead, all we need do is let the market declare itself, confirming its next direction. What will that confirmation be? Ease of Upward Movement, [EUM], on increased volume, or EDM on increased volume. Once the market declares its intent, and it will, we just go with the flow.
What would be some clues?
The above daily chart shows total volume. The one below shows individual contract volume. We look at numbers 1, 2, and 3.
1: Highest volume occurs at the low, and the close is off the low. We always say the market is the BEST source for information. Here, the market is telling us smart money is doing the buying based on the heavy volume. Why? The public does not generate heavy volume. It reacts to prices by panicking out at the lows, unable to withstand any more losses or meet margin calls. Logic gives us the answers to Why and Who.
The location of the close, off the bottom. lets us know buyers were present, or else the close would have been lower, and maybe even the range. A decline in volume over the next four TDs tells us selling pressure has abated.
2: Wide range up, strong volume. [Re-read “Answer” paragraph above last chart]. We see a sign of buying when sellers are supposedly in control.
3: Note the selling “response” to the buying at “2.” After 3 TDs of effort, price has been unable to break under the low of the wide range up bar on increased volume. Why[not]?
Logic would suggest that copper is being accumulated here, or price would have dropped lower. An upside reversal from area 3 would be another important “tell” as to which way copper is likely to move, next.
Why, Who, and a little bit of logic takes the “guesswork” out of which way to go. Waiting for confirmation removes some of the risk in taking a position, and “prediction” is an unnecessary element in trading. Can we be wrong? Absolutely. We will take potential trades like this all day long, knowing the risk is defined and the odds offer an edge. Some will result in losses, but the winners will more than compensate.
Source: The Market.