Metals: time to buy?

October 28, 20212 Comments

Copper recently moved to the top of its range, and then settled back. Its currently sitting at a support level that suggests a potential opportunity. Being the most significant of the industrial metals, its important to watch the trend of copper when viewing the metal producers. Today, I will take a look at the copper chart, along with a diversified metals producer chart to see if there are pending opportunities.

First, lets look at the copper chart. I’ve eliminated all of the indicators and gridlines on the chart to give you a clean view. You’ll note the decline over the spring, followed by a sideways period of support over the summer, and then a sharp rally in October into the old highs. Recently, this rally failed. It appears to be sitting at support (old resistance) around $4.40. Copper could decline to major support – which is the bottom of the consolidation pattern from the summer. That’s near $4.10. A break of that would indicate a double top – nasty! However, a bounce off of current levels, or a decline and holding pattern to $4.10, may indicate opportunity.

Below is the seasonality chart for copper. You can see that the metal enters into its period of strength later in November. The metal can move explosively during the first 4 months of the year – as indicated by the Equityclock chart. January – May can see an 8% outperformance of the SPX by the metal. Yikes!

What about the producers? I’ve posted the chart of the BMO metals ETF (ZMT). My apologies for the fuzzy looking chart – my system shut down and wasn’t loading images properly, so I had to do a lower resolution work-around. Grrrrr! Anyhow- note how ZMT (black line) has broken its downtrend channel. It didnt rally in the way that copper did (red line) in October. The chart shows the correlation line in the first pane below price- note the positve correlation between copper and the producers ETF. Most of the time its darned close to perfect (1.0). Right now its at 0.6. if the correlation goes back to normal, it implies a rally by the producers. We can’t be sure of this happening, so at ValueTrend, we just did one leg in to start. After all, the bottom pane shows us that ZMT has underperformed copper since 2019 – this, despite its actual movements (correlation) being in sync for most of that period.  Disclosure: we just re-bought an initial position in the ZMT after selling it in the summer.

Conclusion

The positives for base metal producers, particularly those with copper exposure, are: Seasonality, the downtrend channel break, and the potential arbitrage as/if/when ZMT catches up with copper.

The negatives include: Lack of outperformance by ZMT since 2019, and the potential for failure of support at $4.40 (more particularly at $4.10) by more than a few days and a few pennies.

For these reasons, we have not gone whole-hog into this trade. There are enough positives for us to take a baby step back into the metals, but you may want to play it step by step like us if you get into the trade. BTW–there are many metals ETF’s, and I use ZMT as illustration only, not as a recommendation.

Update on the Technical Analysis Course

Many of you participated in the survey I put out a few months ago regarding a full-length trading course. I have recently completed the content and have incorporated many of the suggestions I received.  I am now having it reviewed by a savvy peer for input and suggestions. After that, I will meet with the course producers and go over the material, thus beginning the process of filming and producing the course. Its been a fun project. I’ve created a step-by-step program that will enable you to uncover investment candidates, time their entry and exit points efficiently, and manage your positions professionally. ETA for the course is on track for year-end or early in the New Year. I’ll keep you posted.

quote-teal

2 Comments

  • Hi Keith
    Do you think that it’s late to be adding to metals (ZMT) or gold (ZGD)?
    Rgds
    Alvin

    Reply
    • We have kept our gold position as it is, but have added to our metals position recently

      Reply

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