Copper prices consolidate with a bearish bias

Copper is consolidating with a bearish bias that has negative implications on global equity markets. The latter often follow copper.

The copper index (364 at the time of writing) is forming a symmetrical triangle. In this, the price moves in a continuously narrowing range, as buyers and sellers battle to provide market a direction, but fail. This range forms a symmetrical triangle when we connect the peaks and valleys in price.

This triangle is a continuation pattern and since copper fell before it moved into the triangle, one could see a further fall in the price. However, sometimes prices can reverse and move in the opposite direction, and this will be bullish for copper. The direction price takes is confirmed only when prices close outside the triangle. As of now, the prices are still inside it.

If prices break down the triangle, the copper index can go all the way down to 320, which is an area of support. Prices often rally from support levels, and for the copper index, the level is between 300 and 320.

A look at the chart will show the copper prices had rallied from that level in the middle of 2010. If copper falls below that level, it can go all the way down to the lower 200s.

The reason for the fall in prices is the threat of a double-dip recession and the monetary tightening by China and India. Both are huge consumers of copper. Tight monetary policies have curbed demand in both countries. Additionally, growth in the western nations is anaemic and unable to offset the demand slack from China and India. We would, hence, maintain a bearish bias on copper.

However, if the metal breaks to the upside of the triangle, we'd abandon the bear in favour of the bull. This is likely to happen, too, given the fact that China has paused its tightening and begun loosening monetary policy. In India, too, there are hints the Reserve Bank of India (RBI) may pause or reverse its tight money policy, given that industrial output has fallen.

A lower supply of goods, coupled with high interest rates and inflation, could result in stagflation in India. Lower supply will push up prices, which affects the inflation number. Given this scenario, it's felt RBI may begin loosening monetary policy to stimulate supply, even at the risk of rekindling inflation.

These policy changes, or even the anticipation of changes, can lead to a rally in the copper prices. Remember, the rally that began in 2009 was sustained by loose monetary policy across the globe. It's when countries such as India and China began tightening, and the US growth faltered, that copper prices began to fall.

However, based on the chart, we'd not do anything with copper right now. It's best to wait for the breakout before taking an investment decision.

The author is based in Chicago and is the editor of www.capturetrends.com