Technical Analysis Report: Copper (January 18, 2010)

In this week’s Technical Analysis Report, we’ll start by examining activity in the commodities future market to select a metal that looks most favourable, and then move on to equities that could capture any potential upswings.

The U.S. Commodity Futures Trading Commission (CFTC) publishes the Commitments of Traders (COT) Report weekly. The report breaks down how major players are hedging in the futures market.

One way to interpret the data is to follow along with what the large-scale commercial traders are doing, and do the opposite of what the smaller traders, which are lumped into the “Other Reportable” category, are doing.

Moving through the COT Report for platinum, palladium, silver, gold and copper shows copper to have the most favourable conditions. Only silver and copper have more long position than short positions in the Swap Dealers category (Swap Dealers often represent large institutions that are considered “in-the-know”).

The amount of longs for copper far outweighs silvers, however, with 64,537 open long contracts compared to just 7,056 open short contracts. Silver has 19,064 open long contracts and 17,002 open short contracts — a much narrower spread.

Copper is also the only metal with a bullish indicator in the “Other Reportable” category, as it is the only metal with more short positions than long: 7,100 short contracts compared to 5,626 long contracts. Remember, the “Other Reportable” category is a contrarian indicator, meaning that investors should take a position opposite to what investors in this category are doing.

Having identified copper as the metal with the most favourable indicators using the COT Report as a screen, let’s move on to some technical tools to help select a copper play that could partake in any further rally in the red metal.

Quantitative Indicators — The technical indicators used for this session are On Balance Volume, Directional Movement Index (DMI), Rate of Change (ROC), Williams %R, MACD, and Bollinger Bands.

A selection of 10 mining companies with a copper focus were examined. The companies looked at were Quadra Mining (QUA-T), First Quantum Minerals (FM-T), Freeport-McMoRan Copper & Gold (FCX-N), Iberian Minerals (IZN-T), Inmet Mining (IMN-T), Chariot Resources (CHD-T), Norsemont Mining (NOM-T), Katanga Mining(KAT-T), Equinox Minerals (EQN-T) and Western Copper (WRN-T).

Nine of these 10 companies showed considerable correlation, as all were flashing “over-bought” signals. The only company that appeared to be lagging and could, therefore, offer some upside potential was Western Copper.

Western Copper is a copper exploration and development company with key assets in the Yukon where it has the billion-tonne Casino project and the Carmacks copper project.

The company’s share price is currently at the halfway point of the Bollinger Band (whereas all of the other companies are currently at the top, indicating a possible fall).

The DMI chart also offers optimism as the +DI line has crossed the -DI line, which is considered to be a buy signal.

The ROC chart is more ambivalent, as the line has just crossed the 0 line from above — which is generally a bearish indicator — but the line has hovered around the 0 mark since mid-December, indicating a true break above or below is yet to come.

As for the MACD, the signals are also ambivalent. On the bearish side, there was divergence when the share price reached new highs in late October and early November while the MACD line trended lower. However, the MACD line’s recent break above the signal line is considered a bullish indicator.

The Williams %R chart shows Western Copper to be the only one of the 10 companies sampled not to be in the over-bought range. The company is currently at the halfway point between over-bought and over-sold, and is trending upwards, which can be positive.

Trend Analysis — In mid-November the company’s share price broke through a well established support line that began in May of last year. At roughly $1.90, shares broke below the upward trending line.

Since then, its shares appear to be trading in a consolidation channel between $1.50 and $1.80. A break above or below either of those marks could indicate a new trend developing.

Another key support to keep in mind is one that developed through July and August of last year at around the $1.00 mark. If the stock broke down through that level, head for the exits.

— The author holds no positions in any of the above-mentioned stocks.