One of the best-looking trade setups in the market today is in copper.
The price of copper exploded higher earlier this year, as the pandemic caused a supply shortage.
And, from a risk/reward perspective, buying copper right here at $4.32 per pound offers limited risk and plenty of potential reward.
First, let’s take a look at this chart…
We can see copper peaked in May, at just above $4.70 per pound.
At that price, copper was up about 50% in six months. Of course, that’s a dramatic price increase for just about any commodity.
It’s spent the past six months consolidating that gain. The price action over the past few months has created a consolidating triangle pattern on the chart (blue dotted lines).
Copper broke out of that pattern last month with an explosive move back up to the May high.
Over the past two weeks, the price of copper has drifted back down to retest the breakout level as support. It’s also now sitting right on its 50-day moving average (MA) line – which offers additional support.
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If copper has started a new rally phase – which I think it has – then support should hold right here near the $4.30 level. A bounce off of this level would form a “higher low” on the chart and confirm the start of a new rally phase.
That’s the same level one of my analysts recommended buying copper back in August, calling for at least a 5-10% rally. Copper went on to rally up to around $4.80 from there.
On the other hand, if support doesn’t hold, then copper will likely be headed towards the former support line of its consolidating triangle pattern. A break below that line would kick off the start of a new decline phase.
Traders who buy copper right here at $4.30 per pound can set a tight stop on the trade at $4.10. If the support line doesn’t hold, and copper breaks down from here, traders can exit the position for a relatively small loss.
On the other hand, if the multiple support lines hold and copper moves up from here, then it will likely surpass last month’s high of $4.72 per pound.
Any move symmetrical to October’s rally would target a price near $5.00 per pound. That’s a gain of 16% from the current price.
By buying copper right here, traders are risking about 5% for the chance to make 16%.
That looks like a good risk/reward setup to me.
Best regards and good trading,
Jeff Clark
Reader Mailbag
Which direction do you anticipate copper (or commodities in general) will start heading next?
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