Best of the Week
Most Popular
1.UK House Prices Momentum Crash Threatens Mini Bear Market 2017 - Nadeem_Walayat
2.Perfect Storm - This Fourth Turning has Over a Decade of Continuous Storms to Come - James_Quinn
3.UK House Prices Momentum Crash Warns of 2017 Bear Market - Video - Nadeem_Walayat
4.Billionaire Investors Backing A Marijuana Boom In 2017 - OilPrice_Com
5.Emerging Markets & Basic Materials Stocks Breaking Out Together - Rambus_Chartology
6.Global Currency Reserve At Risk - Jim_Willie_CB
7.Gold and Silver: Your Stomach Is Probably Wrenching Right Now - The_Gold_Report
8.Warning: The Fed Is Preparing to Crash the Financial System Again - Graham_Summers
9.Basic Materials and Commodities Analysis and Trend Forecasts - Rambus_Chartology
10.Discover Why A Major American Revolution Is Brewing - Harry_Dent
Last 7 days
You Are Being Lied To About “Low” Gold Demand - 19th Aug 17
This is Why Cocoa's Crash Was a Perfect Setup - 19th Aug 17
Gold, Silver Consolidate On Last Weeks Gains, Palladium Surges 36% YTD To 16 Year High - 19th Aug 17
North Korea Is Far From Being Irrational… It Has A Plan - 18th Aug 17
US Civil War - FUNCTIONAL ILLITERATES TRYING TO ERASE HISTORY - 18th Aug 17
Bitcoin Hits New All-Time High Over $4,400 As It Catches Paypal In Total Market Cap - 17th Aug 17
3 Psychological Ingredients behind Great Web Content - 17th Aug 17
The War on Cash - Rogoff, Orwell and Kafka - 17th Aug 17
The Stock Market Guns of August, Trade Set-Up & Removing your Rose Tinted Glasses - 16th Aug 17
Stocks, Bonds, Interest Rates, and Serbia, Camp Kotok 2017 - 16th Aug 17
U.S. Stock Market: Sunrise ... Sunset - 16th Aug 17
The Next Tech Crash Could Delay Your Retirement by a Decade - 15th Aug 17
Gold and Silver Precious Metals Nearing Breakout - 15th Aug 17
North Korea Showdown: Pivotal Market Turning Point - 15th Aug 17
Tech Stocks DOT COM Bubble Do-Over? - 14th Aug 17
Deep State Conspiracy or Chaos - 14th Aug 17
From the Trans-Atlantic Axis and the Trans-Asian Axis - 14th Aug 17
Stock Market Intermediate Correction Underway - 14th Aug 17
The Islamic State Jihadi Pivot to Asia - 13th Aug 17
Potential Pivots Upcoming for Stocks and Gold - 13th Aug 17
North Korean Chinese Proxy vs US Military Empire Trending Towards Nuclear War! - 12th Aug 17
Gold Stocks Coiled Spring - 12th Aug 17
Neil Howe: The Amazon-Walmart Rivalry Will Determine the Future of Retail - 12th Aug 17
How to Alton Towers Half Price Discount Entry 2017 and 2018, Any Time, No Pre-Booking! - 12th Aug 17
Top 3 Technical Trading Tools Part 2: Relative Strength Index (RSI) - 11th Aug 17
What Makes Women Better Investors - 11th Aug 17
Crude Oil Price Precious Metals Link in August - 11th Aug 17
Influencer Marketing Predictions All Businesses Should Take Into Account - 11th Aug 17
Really Bad Ideas - Government Debt Isn’t Actually Debt - 10th Aug 17
Gold Sees Safe Haven Gains On Trump “Fire and Fury” Threat - 9th Aug 17
Why Is The Stock Market Not Trading On Fundamentals Lately? - 9th Aug 17
USD/CAD - Can We Trust This Breakout? - 9th Aug 17
New Monthly Rebate to Help Reduce Your Trading Costs - 9th Aug 17
Stock Market Divergences Are Now Appearing! - 9th Aug 17

Market Oracle FREE Newsletter

3 Videos + 8 Charts = Opportunities You Need to See - Free

Are Silver and Copper Prices Predicting a Global Recession?

Commodities / Double Dip Recession Oct 01, 2011 - 05:31 PM GMT

By: J_W_Jones

Commodities

Diamond Rated - Best Financial Markets Analysis ArticleSilver and copper have recently been going through their own private bear markets. Since the open on September 1st, silver futures have sold off by more than 25%. During the same time frame, copper futures sold off by around 24%. Both metals are extremely oversold, but lower prices are still possible.

Are the bear markets in copper and silver an attempt to warn market participants that slower economic condition are ahead? Are equities going to take a huge hit on slower future growth?


The notion that lower copper prices will precede a stock market selloff is generally an unfounded allegation. Recently Jason Goepfert of SentimentTrader.com produced the follow table illustrating the returns of the S&P 500 immediately following a bear market in copper over the past 25 years:

The chart above is additional proof that a massive selloff in copper does not necessarily have a major impact on the returns for the S&P 500. However, I would remind readers that volatility in commodities generally precedes volatility in equities.

Precious metals may be getting close to a possible intermediate term bottom. Silver and copper futures are extremely oversold based on a variety of indicators. However, the key to future price action likely will revolve around the price action in the U.S. Dollar Index.

The U.S. Dollar Index has been ripping higher throughout most of September. The rally in the Dollar is placing pressure on risk assets such as equities, precious metals, and oil. The daily chart of the U.S. Dollar Index is shown below:

So far the U.S. Dollar Index has been held back by the $79 price level which has been acting as resistance, but if prices can breakout above recent highs it would not be shocking to see the U.S. Dollar Index test the 80 – 82 price range in the near future. A breakout would likely put additional pressure on silver and copper prices. The two charts below illustrate the recent correlation between silver and copper prices and price action in the U.S. Dollar Index:

Silver : Dollar Correlation

Copper : Dollar Correlation

Additionally the S&P 500 could break below the August lows and oil could follow suit if the Dollar continues to work higher above recent resistance. If October turns out to be an ugly month for risk assets as pundits have predicted, then the U.S. Dollar will likely perform relatively well in the intermediate future.

Clearly there is political risk coming from Europe which could alter price action in risk assets in a variety of ways. Financial markets are volatile across the board and large intraday price swings are becoming common place.

In many cases the headlines will have more impact than the fundamentals or the technicals in this type of trading environment. However, the longer term support and resistance levels should hold sway even during times of exacerbated volatility. The weekly charts of silver and copper futures are shown below:

Silver Weekly Chart

Copper Weekly Chart

Clearly the price action in silver and copper in late August and throughout September has been ugly. Both metals are oversold in nearly every time frame, however if the Dollar continues to strengthen we could see deeper declines in both silver and copper prices as illustrated in the charts above.

Currently fundamentals and technical analysis cannot be relied upon solely when making trading decisions. However, the longer term support and resistance levels derived from the charts above give informed traders areas that offer solid risk / reward exits for profit taking and entries for those looking to get long silver and copper.

Trading Conclusion:

The data provided above regarding equity returns after a bear market in copper are sufficient enough to state that lower copper prices do not necessarily project lower domestic equity prices in the United States. With that said, the correlation between the price of copper and the IShares FTSE China 25 Index Fund (FXI) is irrefutable. Lower prices recently in copper are directly correlated in the price action of the FXI China Index fund as shown below:

FXI China Index Fund : Copper

The recent price action in the FXI China Index fund is ugly to say the least. As shown above, if the U.S. Dollar continues to strengthen copper, silver, and the FXI will likely continue to trade lower. Clearly the recent price action in Chinese markets is concerning for domestic equity investors, but an economic statement released earlier today is an ominous signal in the immediate future for U.S. equity investors.

On Friday the ECRI (Economic Cycle Research Institute) came out with a statement that the U.S. economy is headed for a new recession that the U.S. federal government cannot prevent. Data is starting to show signs that a new recession is not only possible, but quite likely in the near future. One of the key underlying assets to monitor for future clues about price action in risk assets is the U.S. Dollar. In coming weeks and months, I will be monitoring the U.S. Dollar closely. I think it would be wise if you did as well. Headline risk is increasingly high!

Review my track record and join now at http://www.optionstradingsignals.com/specials/index.php and receive a 66% off coupon which expires tomorrow.

 J.W. Jones is an independent options trader using multiple forms of analysis to guide his option trading strategies. Jones has an extensive background in portfolio analysis and analytics as well as risk analysis. J.W. strives to reach traders that are missing opportunities trading options and commits to writing content which is not only educational, but entertaining as well. Regular readers will develop the knowledge and skills to trade options competently over time. Jones focuses on writing spreads in situations where risk is clearly defined and high potential returns can be realized. 

This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.  


© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife