Technical Analysis: Copper and commodities continue to rise

5th Jun 2009 10:35

The rally in commodity prices since the turn of the year has continued to raise expectations around the globe of an imminent economic recovery.Certainly there have been a number of indicators that have turned positive on the major commodity indices over the past couple of weeks. Mining shares are currently posting impressive gains for a number of reasons, not least Rio Tinto's scrapping of its Chinalco deal and the announcement of a $15bn rights issue.It would be easy to get caught up in all the hype surrounding Friday's rally, but on Thursday eight of the biggest fallers on the FTSE100 are the same companies that are posting gains today. Rio is currently up over 10%, but significantly it is still below its May high of 3,193p.Since the beginning of the year the main commodity indices, Reuters CRB, Goldman Sachs Commodity Index (GSCI) and Rogers Commodity Index have posted significant gains. However, of these three indices, at least two of them have large oil components, therefore it can be suggested that they are not an accurate bellwether of commodity price recovery.Both the GSCI and Rogers have an oil weighting of 43% and 35% respectively, which makes them far too susceptible to crude oil movements. The Reuters CRB, on the other hand, only has a 23% exposure to crude prices.It has 19 components, though it has to be said it is slightly lighter in metals than it should be, making up 20% of the overall index, with Gold only accounting for 7% and aluminium, copper and nickel making up the remaining 13%.Of the three indices, while the GSCI and Rogers indices have crossed above their 200 day averages and are in a clearly defined up trend, the picture with the CRB is less clear-cut. It is currently trading either side of its 200 day moving average and is struggling to clear it decisively, even though it has made new highs for the year. Does that mean that this rally is a bull trap? Not necessarily, various commentators have noted that Copper is generally a good indicator of economic strength. Dr. Copper, as it is known because of its ability to forecast that state of the economy, has rallied impressively since its lows of $2,817.50 in December last year. It made new highs for this year of $5,146.50 this week, which is quite an impressive performance. However, only 12 months ago Copper was trading at $8,940, so despite doubling in value since the end of December, it has only recovered 38.2% of its losses of the last 12 months. The best performing base metal over the last year has actually been Zinc along with Lead, which has rallied back around 50% of the losses of the last 12 months. The best indicator of base metal strength is the performance of the LMEX base metal index which since February has been trading steadily upward with a clearly defined up trend line currently around 2,201. In the last 12 months this measure of base metal prices has only managed to recover a small proportion of its losses of the year to just shy of its 38.2% Fibonacci retracement level at 2,538.10, closing yesterday at 2,376.20. Using this index, the rally in commodities can be better measured using the trend line above. Whilst this line remains intact then commodity prices should remain fairly stable, however a break below this level could indicate a decline in recovery prospects as commodity prices fall back.For periodic TA updates follow me on TwitterAlso read my Investors Guide to Technical Analysis and Level 2