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Watching Copper Closely Here for a Short-term Breakout

The selloff in Copper (HG), which started with a breakout signal back on May 19, has progressed further than anticipated, hitting a recent low of 2.3215 on August 3 in the September contract.

The price is still hovering near that low, which is also near the 2.3375 low seen in late July. Having bounced and being unable to make headway, and now trading right back near the low, this current consolidation is one to watch closely.

The consolidation between 2.3215 and 2.3745 comes right near the bottom of a descending trend channel which extends back to May. That it is already at the bottom of the channel is one reason to potentially avoid a short trade here, but recent weakness is a case for the short. Therefore, consider this a consolidation of interest for a potential trade in either direction.

Figure 1. September Copper Futures, 4-Hour Chart

The breakout of the consolidation to the downside is a tradable, with a target of 2.25 (2.20 is a more aggressive target). Be on high alert for false breakouts though. If the price breaks below the consolidation and then quickly rallies back into it, it very well could retrace toward the top of the channel, in the 2.40 to 2.430 region. If that scenario develops look for a consolidation, like we are seeing now, and then a break to the downside. That is a higher probability trade than the current one as the price will be near the top of the channel, where it has shown a tendency to decline from.

Overall copper is in a downtrend, so short trades are still preferred, but always be aware where a trade is taking place in the context of the overall price movements. Copper still could move lower, but based on the trend channel is it quite extended to the downside currently, so a pullback (higher) is a definite possibly. That said, we can't ignore the current weakness, and a break lower is a tradable move...just be on your toes and keep the stop loss relatively tight. If the price breaks higher, targets on long trades should be kept conservative, since the trade is going against the longer-term trend.

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