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A strange thing is happening on the way to the
commodity collapse. It’s the most powerful rally that has been seen for
months. This is occurring across the London Metal Exchange (LME) metals complex.
The
breakout patterns seen with aluminum reflect the same patterns seen in
lead, zinc, copper and tin. The breakout in aluminum is the most
developed. Many LME metals are moving in a similar way, but aluminum is
most advanced so it gives guide for other developments. It has these
three features.
First is the change in the relationship in the components of the Guppy Multiple Moving Averages
(GMMA) indicator. This indicator tracks the implied behavior of
investors and traders. The short term group of averages in blue track
trader behavior. Compression shows agreement about price and value and
hints at a change in trend.
The
same applies to the long term group of averages, but investors are
slower to change their opinion. The GMMA on the chart shows the classic
pattern of test and retest of the strength of the downtrend. Each time
the short term GMMA moves deeper into the long term GMMA, setting up the
conditions for a breakout.
The
power and stability of the breakout is confirmed when the long term
GMMA compresses showing investor agreement on value and price. This
happens quickly, and the long term group is now moving upwards. This
shows a change in investor opinion.
The
key test will be when the rally for LME aluminum retreats from initial
resistance near $2,020 per tonne and retests support near $1,930. This
is also the value of the upper edge of the long term GMMA. A move above
$2,020 has upside target near $2,070.
The
second feature is the triple bottom that developed between June and
August. This is a powerful reversal feature that added to the
probability of a sustainable breakout. This is an end of downtrend
consolidation pattern, developing just at the time when many people were
calling for a downtrend continuation in commodity prices.
The
third feature is the broad consolidation pattern that developed as the
market moved sideways. The width of the consolidation pattern is
measured, and the value projected upwards to give the first breakout
targets. This projection gives a target near $2,020. This combination of
projection targets and historical resistance suggests this level will
act as a retreat feature.
However,
the strength of the GMMA breakout suggests that any retreat is an entry
opportunity for traders who want to take long side positions in
anticipation of the trend continuation.
Not
every metal traded on the LME shows exactly the same behavior. However
the GMMA relationships are repeated and they confirm a commodity
rebound. The sustainability of the rebound is unknown, but the change in
the behavior of the long term GMMA – in investors’ expectations –
suggest a sustainable trend breakout.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.
If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.
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