Experience teaches us to keep an open mind and adjust for new information. So while I think the stock market is in a bear phase that can last for several months or more, I have to admit that Dr. Copper is presenting evidence on the side of the bulls.

Just last week, I wrote here that the ratio of copper to gold performance points to a risk-averse marketplace. “Copper, the metal with the so-called Ph.D. in economics for its tendency to start falling in price ahead of an economic downturn and rise ahead of an upturn, continues to lag gold.”

This is still true. The trend in this ratio is unchanged since last week.

But the pattern in copper itself shows something very interesting – and possibly bullish in the short-term. Since falling sharply in November to seven-year lows, the metal stabilized and now appears to be completing an inverted or upside-down head-and-shoulders pattern (see Chart 1)

Chart 1


This common pattern suggests a transition phase from bear to bull as declines weaken and bounces strengthen. Technical momentum indicators confirm this by setting higher lows even as prices set lower lows. In charting lingo, that is called a bullish divergence. And price typically changes direction to follow the indicator.

The reason copper suddenly caught my eye was not the pattern, which was already visible last week, but rather its performance Monday, when the U.S. dollar index was nicely higher. Typically, metals move inversely to the greenback since they are priced in dollars. So when both rally together, it’s time for a closer look.

The good news is that basic technical targeting techniques suggest a gain of 10-15% is possible in just a few weeks. The height of the head-and-shoulders projected up from the presumed breakout point gives us a first price objective of roughly $2.40 per pound (copper traded at $2.12 Monday). This is close to the 200-day moving average as well as resistance from the October, just before copper began its accelerated descent.

I want to pause for a moment to stress the term “presumed breakout.” There has been no breakout at this time, and anticipating one is a risky endeavor. Further, this is all short-term stuff. A big trendline coming into view, drawn from the August 2011 peak and arguably where the bear market began, could prove to be an insurmountable barrier.
Investors can track this market via the iPath Bloomberg Copper Subindex Total Return exchange-traded note. However, due to its lack of trading liquidity it is probably better to use to for tracking and not investing.

One proxy would be copper mining stocks such as Freeport-McMoRan. This stock also began its bear market in earnest in 2011, and really fell apart in 2014 at about the same time as oil broke down. It is currently trading at about $7.85, down from a 2011 high in the mid-50s, so it has been a particularly brutal bear market.

It has more than doubled since its January lows off of an admittedly very low price (see Chart 2). It sports bullish divergences in momentum indicators and is now challenging a trendline drawn from mid-2014. If it were just to reach its 200-day moving average in a few weeks as the average drops to about $10.00, that would be a hefty return. To be sure, the stock’s surge is at least partially attributable to the news that activist investor Carl Icahn had increased his stake in Freeport-McMoRan.

Chart 2


Keep in mind that the most decimated sectors – copper certainly is in that group – benefited most from the market’s most recent bounce attempt. Freeport has not yet moved above that trendline and it is hard to build a technical case to buy the stock until it does. Perhaps others can build a fundamental case for copper and the economy.

In addition, peers such as Southern Copper sport falling trends in cumulative volume, which is a proxy for money flowing out of the stock. Even diversified copper and other metals miners such as Rio Tinto sport unimpressive flows as they bounce.

Is this just a dead-cat bounce? A short-covering rally? It may very well be.

The point here is not to run out and buy copper or copper stocks. Rather, it is to pay attention to what the financial and commodity markets are telling us, especially because their message casts doubt on the bear market case for stocks.