Triple Timeframing the Breakout in Copper JJC

Feb 1, 2011: 10:28 AM CST

Many investors and traders look to copper prices to gauge the strength or weakness of the economy, as copper is an industrial metal used in all sorts of construction projects.

If that sentiment holds true, then copper just sent a big “economic recovery” message this morning, as it has been doing over the last few months.

Let’s “triple timeframe” Copper prices and then finish by looking at the current tradeable JJC Copper ETF:

This is one of those things where, until you see it, it’s hard to imagine.

Copper has already exceeded its 2008 peak (stocks peaked in October 2007), meaning Copper is not just at new recovery highs, but at all-new highs, having exceeded the price at the start of the Bear Market Recession.

The NASDAQ 100 has also accomplished this feat (though it’s not above its 2000 high) and the broader NASDAQ index is nipping at exceeding its 2007 peak.

That’s really the main idea of the monthly chart – Copper is beyond its 2008 pre-bear market peak, and momentum is confirming the recent push up.

The weekly chart shows a similar positive strength:

The $400 level in copper was key resistance, as it was both a “round number” and was the peak of the market ahead of the 2008 recession/bear market.

There were three weeks of downward prices that ended at the rising 20 week EMA at $375 and copper broke powerfully through the $400 level, officially changing the game to the bulls – and copper broke this morning to a new high above $450 which served as nominal price resistance.

As long as copper remains above $450, it’s a strong bullish vote of confidence in the economy… and the inflation ‘created’ by the QE2 liquidity policies of the Federal Reserve.

As a note, the momentum oscillator registered a new swing high just ahead of the breakout which contributes to the bullish chart picture.

Finally, let’s drop to the daily frame to see lessons in trading power-moves like this:

StockCharts uses End-of-Day data for their indexes, so that’s why I’ll show a chart of JJC (ETF) shortly.

Main idea:  After bottoming in June, Copper showed signs of strength, breaking its daily EMAs, forming a “Kick-off” strength sign,  then supporting in August on the 50 EMA.

From there, price broke through the little resistance line at $350 and continued supporting – creeping – up the 20 EMA.

Like stocks, November’s pullback took price down to the rising 50 EMA and lower Bollinger as price then broke the “Bull Flag” trendline, triggering another potential entry.

As I’ve shown in prior examples – in Netflix and Apple particularly – the BEST way for most traders to play these breakaway moves is to put on positions at one or two specific points in time during a seemingly ‘non-stop’ rally:

1.  Buy Pullbacks to rising 20 or 50 EMA, trailing the stop just under these levels

2.  Buy Price Breakouts above trendline/price resistance (after supporting on EMA)

Depending on your strategy, you’ll graviate to one or the other, though most people feel more comfortable with buying pullbacks than buying breakouts.

The pullback strategy offers a tighter and known stop-loss, while the breakout doesn’t do that (unless you place the stop just under the breakout trendline).

Also, breakouts feel like you’re ‘chasing’ the market and makes you worried that the moment you enter, the price will reverse.

It might – but the only way to overcome this notion is to see multiple prior examples (like this) of when the set-up worked and the outcome of the breakaway move.

Not all breakouts lead to nice moves, so you must protect yourself with a stop-loss in the event any breakout turns into a mean bull or bear trap.

Let’s take a final look at the tradeable Copper ETF:  JJC

We also get volume insights from JJC that we don’t get from the Copper Index.

Notice that on the little breakouts, volume (buying) rose each time, including now – that’s a good sign for buyers.

While the index gives us end-of-day data only, the JJC shows up-to-date information – and that the key level to watch here is $60.

So as long as Copper (index) remains above $450 and JJC remains above $60, then we can expect potentially higher prices as the economy recovers (along with consumer confidence) and the Fed maintains its inflationary goals/policies via QE2.

A breakdown sharply under these levels – particularly the $56 area in JJC and $420 in Copper –  would thus dis-confirm a bullish thesis.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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2 Comments

2 Responses to “Triple Timeframing the Breakout in Copper JJC”

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  2. Bri Says:

    Corey – looks like a short squeeze in the markets today! I thought for sure we'd have a correction but luckily I was prepared with mental if-then statements to guide my actions. I will probably have to exit my SDS hedge at a loss, but I made a little money on a long trade in ES this morning so that cushions the blow.