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April 3, 2014, 12:44 p.m. EDT

Should it be Dr. Copper or Pinocchio?

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About Martin Pring

Martin Pring is president of Pring.com a technically oriented educational web site and chairman of Pring Turner Capital, a conservative money management firm. He is the author of Technical Analysis Explained, now in its fourth edition and seventh language. He is a recipient of the coveted MTA Annual Award, Canadian CSTA Jack Frost Memorial Award and a fellow of the British Technical Society. His latest (co-authored) book is “Investing in the Second Lost Decade.” He helped create the Dow Jones Pring Business Cycle Index (DJPRING), a dynamic rules-based model designed to help institutions and individuals. An actively managed ETF (Symbol DBIZ) based on the strategies used in the Index, trades on the NYSE.

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By Martin Pring

Many observers have pointed to the recent weakness of the copper price as an indication of a forthcoming decline in commodity prices generally. Copper is said to have a Ph.D. in economics, hence, the “Dr. Copper” title, because it is regarded as a sensitive indicator of business activity. But is that still true?

For a larger chart, please click here .

Looking at the first chart, one cannot escape the conclusion that the price of the red metal has completed what we technicians call a head-and-shoulders top. The vertical blue arrow on the left calculates the maximum depth of the pattern, which is then used to establish a price objective when applied at the point of breakdown.

In this case, the downside objective would call for the price to fall to the $2.40 area. That's all it is though, an objective, certainly not a guarantee. Both momentum series in Chart 1 are declining and therefore adding credibility to the downside break, so why "Pinocchio" in the title of this article?

First, no other industrial metal has confirmed copper on the downside. Second, from a contrary perspective, the latest consensus bullish number for copper stands at a lowly, and therefore constructive, 28%.

Third, at speaking engagements in several European countries the week before last, the subject of copper was broached consistently at every stop. Normally, it's the stock market, gold, etc., that is on the mind of investors, but what was duly brought up in the Q and A? Copper. Anecdotal contrary evidence perhaps, but why the widespread concern?

A fourth reason is that our models used in allocating assets for clients and the Pring Turner Business Cycle ETF  have turned bullish for commodities in general. Remember, the Conference Board's leading indicator index touched a new recovery high in February. The leading indicator for the OECD, a proxy for the global economy, is also in a rising trend.

For a larger chart, please click here .

Finally, Chart 2 shows the price of the red metal plotted on a monthly basis. We can make several observations: First, unlike the weekly chart, the price has not yet completed a top by breaking below the red trendline. It came pretty close, but no breakdown.

Second, my long-term momentum indicator is bullish and by no means overextended. This leaves plenty of upside potential before it becomes overstretched. The arrows flag 16 buy signals in the last half century. These are triggered as the indicator crosses above its moving average from a sub-zero position. All the signals except 1990 were followed by rising prices. That's a pretty consistent record. The solid arrows show very profitable signals, and the dashed arrows questionable ones, where gains were truncated.

This presents strong evidence that the Pinocchio label might stick. Nevertheless, as long as the price is below the red trendline in Chart 1, we should assume that the top is still valid . But, if it rallies decisively back above the neckline, say to $3.15, that, in conjunction with the other evidence presented would suggest that the pattern had failed. Note the emphasis on the word "if." The issue would be placed beyond reasonable doubt with a rally to $3.40, which would represent a decisive move above the green down trendline. If the pattern is cancelled, copper will at least temporarily have to be stripped of its Ph.D. title and experience a name change, and that name would be Pinocchio.

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