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Consolidation Breakout in Copper

July copper futures (HG) held steady between May 4 and May 18, between 2.956 and 2.888. The consolidation was the top of a rally which commenced in late January from the 2.4245 low.  In mid-2014 copper was trading as high as 3.2945.

Tight consolidations can't last long. When trading a consolidation breakout, consider that false breakouts from narrow ranges like this are common, before the real move ensues. Be on your toes and ready to switch direction if the price action dictates.

Figure 1. July Copper Futures (HG) - Daily Chart

On the bearish side, the long-term trend is down. The rally since January places copper right at a 2.5 year descending trendline (not shown, possible resistance). The 2.888 to 2.956 consolidation has also occurred at the top of the rising channel which commenced in January. This isn't necessarily a strong resistance area, but the top of the channel is where the price has tended to pullback. The consolidation also comes after barely edging past the March high of 2.9105. If the price breaks lower from the consolidation the target is the short-term rising trendline at 2.75. 2.70 is a more aggressive target. If that scenario occurs, the uptrend is still intact at those levels and may present a buying opportunity.

On May 19 the price aggressively broke the consolidation to the downside. Much of the profit potential has already been absorbed on the trade, but the lesson is still useful.  Watch for these tight consolidations and have a plan for how you will trade the breakout, before it even occurs. Consolidation breakouts near the edges or trend channels--such as this trade--often provide the best opportunities.

The bullish case (now drawn seriously into question) is premised on the rising short-term trend, and the strong move higher in late April followed by the consolidation. This created a flag formation, which is now broken. Even though the flag is broken, a move back above the prior consolidation provides an initial target at 3.0650 (resistance).

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