Base Metals Technicals 2
Jun 9, 2006
Some of the most fascinating and amazing market action this year
has occurred in the base metals. They have blasted stratospheric
in mighty parabolic surges, exhibiting tremendous volatility
that even dwarfs that of the stock markets. And now they are
largely retreating in healthy bull-market corrections necessary
to bleed off their earlier speculative excesses.
This jaw-dropping volatility in the base metals is even more
remarkable considering how young their bull markets are. Several
years ago the base metals, which in the markets are defined as
any metal that is not considered precious, were languishing near
secular lows. Not even the contrarians who were zealously trading
the precious metals at the time cared about the base metals.
Yet regardless of their lack of sexiness, the laws of supply
and demand function just as well in the base metals' realm. World
demand for base metals was soaring on the back of the industrialization
of Asia, but new mines were not being constructed since prices
were too low to make supplying base metals worthwhile. The resulting
global supply crunch has driven base metals to levels unimaginable
only a few years ago.
The past several months since I wrote my original
essay in this series have been some of the most exciting
in history for the base metals, so this week I want to update
my charts and analysis. Before I delve into this, I'd like to
relay an interesting anecdote that happened to me earlier this
week that puts this analysis in context.
In recent newsletters for our subscribers, I have been discussing
the ongoing metals corrections extensively. Corrections are inevitable,
every bull market in history has flowed and ebbed, taking two
steps forward in dazzling uplegs before retreating one step back
in necessary corrections to restore balance to sentiment. These
steps back are immensely valuable as they provide the best buying
opportunities of any bull market.
A few days ago in our Zeal
Speculator alert service, I was discussing potential interim-bottoming
targets for copper's ongoing correction. One gentleman wrote
in after the alert was published and he was not happy with my
thoughts on copper's probable near-term fortunes. After telling
me I was smoking something, he pointed out that copper is ultimately
in short supply, that China cannot build its infrastructure without
copper, that the fleets of hybrid vehicles being produced worldwide
each use large amounts of copper, and on and on.
He was absolutely correct in his fundamentally bullish arguments
for copper. Fundamentally the base metals all look outstanding.
Their supplies were neglected for decades and now the rise of
Asia is adding unprecedented demand. And it will probably take
at least another decade or so before enough new base metals mines
come online to address this structural deficit, so prices should
continue to rise on balance in the meantime. But long-term fundamental
arguments mean nothing in the face of short-term technicals.
No markets rise in a straight line forever and neither will the
base metals. As the base metals technicals clearly show, they
became radically overbought by any standard in the last few months.
When speculators get too euphoric and drive prices to extremes,
corrections are necessary to bleed the greed out of the markets
which ensures the bulls' ultimate longevities are not damaged
Corrections are not threats to investors and speculators, but
opportunities to realize profits and reload positions at the
resulting interim lows. So as you digest these base metals technicals,
get in the crucial speculator mindset of seeing corrections as
a gift you can capitalize on to buy bargains at the coming interim
lows, not a threat. And realize that bearish short-term technical
arguments never impair long-term bullish fundamentals.
Copper is the undisputed king
of base metals. In the heavily wired Information Age, this efficient
conductor is ubiquitous in everything from buildings to cars
to electronics. It is one of the most essential commodities for
modern civilization. In the markets, copper usually sets the
tone for the rest of the base metals. As such, copper is the
best place to start examining the current base metals technicals.
Copper has had an absolutely amazing bull run in the last several
years. Three years ago this week it was trading under $0.77 per
pound. But at the end of its latest parabolic surge in late May,
it closed near $4.08! This 430% gain is breathtaking and illustrates
just how incredible the base metals' performances have been.
The majority of these dramatic gains, however, have accrued only
since February which is just far too rapidly in the grand scheme
Back in 2003 copper was in a nice solid uptrend. It eventually
broke out in late 2003 and early 2004 with a very impressive
58% surge in only 67 trading days. This secular awakening of
copper put it on the map again for many speculators. China was
starting to bid on copper worldwide which drove prices up and
speculators jumped on for the ride, fanning the flames. After
this first major upleg, copper modestly corrected 18% over the
next 54 days before entering its next major uptrend channel that
lasted until late last year.
Back at the time it unfolded, copper's 2003/2004 upleg looked
vertical, totally unsustainable. But copper really didn't correct
too radically after such a powerful surge. After an initial modest
correction it started consolidating and grinding sideways to
higher. This behavior illustrated that pure global supply and
demand fundamentals were a much bigger driving force behind copper's
first upleg than speculative fervor.
Fast forward to last summer. In May 2005, copper was trading
just over $1.42, already back above its early 2004 highs. Over
the next year or so, copper would ultimately run 187% higher
over 257 trading days. This occurred in two distinct phases,
an initial 64% upleg running into early February and a secondary
91% parabolic surge that erupted in late February. The latter
is the reason why copper is almost certain to correct.
Up until February, copper's 64% run over 183 trading days was
totally normal. It was certainly a strong upleg, but it was justified
because global copper demand growth continued to exceed supply
growth. If copper had topped on an interim basis in early February
at $2.34 as it probably should have, I would have expected a
modest correction leading into a long sideways consolidation
as this metal had done in 2004. But then something incredible
Speculators, largely hedge funds, started deploying enormous
amounts of capital into commodities futures. At the time oil,
gold, and silver were all strong which was spawning interest
in the commodities realm outside of the usual players. Much new
capital poured into hedge funds, which promptly deployed it in
futures and drove base metals prices parabolic. Copper itself
rocketed up 91%, nearly doubled, in just 60 trading days!
This magnificent parabolic surge certainly sticks out on this
chart. It was like copper looked normal until February then the
character of its bull totally changed. The problem with parabolas
is they are never sustainable. As a price shoots vertical on
a chart and nearly doubles in a short period of time, the amount
of capital necessary to continue generating gains of this scale
grows exponentially. Without enough continuing buying to offset
the selling of the speculators locking in their gains, the only
thing the parabola can do is collapse.
And so far it looks like this collapse has started for copper.
The parabolic collapse in this case is certainly not going to
end the copper bull, but just close the book on a particularly
exuberant upleg. Through this process of correcting, copper will
bleed off the excessively optimistic sentiment so common lately
and restore balance. Sooner or later this metal will bounce and
provide an awesome opportunity to add more longs including the
stocks of elite global copper producers.
No matter how bullish copper's fundamentals are, a vertical 91%
gain in just three months is beyond the realm of reason or sustainability.
Industrial users that drive true physical demand cannot bid up
prices fast enough to spawn a parabola. Only speculators can.
But speculators, since we don't actually need or want the physical
copper, can exit long positions just as fast and drive a symmetrical
correction. Since this has already started, extreme caution is
in order for copper until its price starts to stabilize again.
Interestingly zinc's parallel parabolic surge is even more extreme
than copper's! This metal skyrocketed 98% in just 58 trading
days and ultimately crested at unthinkable levels over twice
as high as its baseline 200-day moving average. Like in copper
though, such incredibly fast surges leading to verticality are
never sustainable. Zinc's necessary correction to rebalance its
sentiment has already started.
This chart is utterly amazing!
If anyone would have told me a year ago that zinc, a relatively
obscure base metal compared to the headline commodities, would
rocket up 228% in just one year I would have laughed. Yet here
we are. Such an extraordinary move in such a short period of
time, especially the final double since February, has carved
one of the most textbook-perfect parabolic blowoff patterns I
have ever seen. Such a mighty surge will absolutely have consequences.
Now what are the odds that zinc was so horribly undervalued fundamentally
at $0.91 in February that it had to double over the next few
months to reach fair value on a pure supply and demand basis?
Pretty slim. Industrial users of zinc know about how much they
will need months or years in advance so they gradually buy and
lock in their prices with futures. It is only speculators that
can and will buy aggressively enough to spawn a true parabola,
an enormous surge in a very short period of time.
At any time, even at the apex of a parabola, prices can only
do one of three things, rise, flatline, or fall. To rise, regardless
of where a price is, new buy orders have to continue to outnumber
sell orders. Thus for zinc's parabola to extend higher, some
big buyers have to come in and not only absorb all the speculative
sell orders from funds realizing their profits but provide marginal
demand on top of that. As the 17% initial slide in zinc over
just 6 trading days has shown, this apparently is not going to
The second possibility is the parabola flatlines, a new price
plateau is reached and prices trade sideways. For this to happen,
enough buy orders have to come in at these stellar zinc prices
to totally offset sell orders from speculators locking in their
immense profits. This almost never happens though. If you wanted
to buy zinc either as a speculator or an industrial user, and
you thought prices were heading lower, why not wait a couple
weeks or months to try and get a better price? No one wants to
buy once parabolas start faltering.
Hence the final, and most likely by far, outcome after a parabola
is a sharp correction. At the top, prices seem crazy high to
everyone. Speculators sell aggressively to lock in their profits
and sell orders dwarf buy orders so prices start falling. These
falling prices spook other speculators who soon join in lest
they give back all of their gains. This cascading selling starts
damaging sentiment. Buyers don't come into the market again in
volume until prices start to stabilize after the plunge frightens
most of the potential sellers into selling, or shakes out the
No matter how bullish zinc's long-term fundamentals may be, it
is not immune from these temporary psychological extremes that
dominate short-term market action. If you want to go long zinc
or buy zinc miners, the best time to do it is after a correction
when fear is high, not near a parabolic top where euphoria runs
rampant. Zinc, like copper, simply cannot sustain nearly 100%
gains in just a few months. They are too extreme.
Nickel, which is primarily used to make alloys like stainless
steel, has also joined in the recent extraordinary base metals
action. Interestingly though, nickel's recent runup was nowhere
near as extreme as those of copper and zinc. Nickel, thanks to
its earlier 2003 parabolic ascent, also illustrates the potential
aftermath of a parabola in the midst of a strong bull market.
In 2003 nickel soared, up 130%
in just 187 trading days. The apex of this vertical move drove
it to extremely high levels relative to its baseline 200dma,
over 1.75x above it. While fun at the time for speculators long
nickel, the extreme speculator greed necessary to drive parabolas
has inevitable consequences. Thus in early 2004 nickel corrected
and fell sharply, ultimately bleeding off 41% over 92 trading
It is important to realize that this correction, while vicious,
in no way jeopardized nickel's ongoing secular bull market. Nickel
corrected back down to its old support line, which was under
its 200dma that had been jacked up faster than usual due to its
2003 parabola. And after its 2004 correction bounced, nickel
established an excellent new uptrend and continued moving higher
for over a year. This event is crucial as it illustrates how
a short-term parabola and its aftermath can be fully digested
in the midst of a secular bull without threatening to end the
My best guess for the outcome of the current copper and zinc
parabolas is they will follow a similar course to nickel's earlier
example. They will correct and grind lower for several months
or so, ultimately falling under their 200dmas since those 200dmas
were rising abnormally rapidly in response to their parabolas.
These bounces could even go as low as the latest support lines
of copper and zinc. I'll certainly be watching for these next
interim lows wherever they happen as I am really excited to redeploy
into base metals miners when they are once again technical bargains.
Back to nickel's recent technicals, it was up 101% over 144 trading
days since late last year. Now this is certainly a big upleg,
even a quasi-parabolic surge, but to me it doesn't quite feel
fully parabolic. There is a big difference between a price doubling
in three months and it "merely" shooting 59% higher.
Nickel is and ought to be correcting after such euphoria, but
ultimately its correction should be considerably milder than
copper and zinc because its preceding parabolic pattern was so
much less extreme.
If you aren't happy with all these technicals pointing to probable
ongoing corrections in copper, zinc, and nickel, then you should
be pleasantly surprised by lead. Lead's own quasi-parabolic surge
topped in early February and it has been correcting ever since,
off 30% so far. Unlike the other base metals, lead is already
back down to its technical strong-buy zone below its 200dma from
whence its next upleg is likely to launch.
Lead is really interesting
and also offers insights into the likely near-future paths of
copper and zinc today. In 2003 and early 2004 lead soared 127%
higher in a strong upleg over 215 trading days. While the end
of this particular rally came close, it never quite went vertical
and hence it doesn't feel like a true parabola to me. But the
consequence of this immense strength was a sharp 29% correction
over about seven weeks. Yet immediately after this correction
rebalanced sentiment, lead started marching slowly higher again
in a new uptrend. The 2003/2004 parabola and its aftermath didn't
hurt the secular bull.
Fast forward to 2005, lead started powering higher again last
summer just like the rest of the base metals. For some reason
it peaked in early February though and did not participate in
the strong secondary surge from late February to late May that
drove the rest of the base metals straight up. As for reasons,
I've yet to hear a really convincing thesis that could explain
this lead lethargy. All I know is that lead is largely unloved
and politically incorrect and speculators didn't flood into it
in recent months like they did with the other base metals.
The result of this lack of secondary-surge participation is lead
is already technically cheap today, and it may be at or nearing
the end of its correction as long as it isn't sucked into a sympathetic
slide with the other base metals. Unfortunately this technical
bright spot in the base metals is not easy to capitalize on.
Unless you trade futures directly on the London Metal Exchange,
it is hard to buy lead or lead options.
And to the best of my knowledge there is still only one publicly
traded pure-play lead miner in the world. While we recently recommended
it in our newsletters, it is not yet traded in the US stock markets.
Thus unfortunately this lead weakness is not as easy to capitalize
on as the eventual interim bottoms in the other base metals will
be. Indeed it is quite possible that one reason lead didn't participate
in the secondary base metals surge in recent months is because
it is so difficult for American speculators to trade it directly
The final major base metal is aluminum. While it did mirror the
surges of copper and zinc, in magnitude terms it didn't even
come close to seeing similar gains. With aluminum's recent secondary
surge only up 38%, I would classify it as a strong upleg and
not even a quasi-parabola. This also suggests that aluminum's
necessary correction to rebalance sentiment should be considerably
milder than copper's or zinc's.
In light of aluminum's more
sedate gains since last summer and February, it is ironic that
its young correction is leading, at the moment, the base metals
that participated in the secondary surge. Aluminum was down 20%
by Wednesday night, the data cutoff for this essay, compared
to 17% for zinc, 15% for copper, and 11% for nickel. This anomaly
probably won't persist though, as the metals with the most extreme
parabolic surges should ultimately suffer through the biggest
The base metals technicals are very interesting today. They generally
show extraordinary surges in these metals, especially since February,
driven by pure speculative fervor. They now reveal corrections
that are already well underway. But they also show that parabolic
surges in base metals have happened in the past and they did
not damage their ongoing secular bulls. While they did need to
correct for a season to rebalance sentiment, their bullish uptrends
resumed afterwards none the worse for wear.
In light of these base metals technicals, I believe the best
course of action today is to expect further corrections in most
of the base metals. They became far too overbought in the past
month and they need to correct to rebalance sentiment. On the
bright side, ultimately these corrections will spawn the next
interim lows that will provide the best buying opportunities
before the next major base metals uplegs erupt.
At Zeal we are always watching the base metals and waiting for
this opportunity, researching the most promising base metals
miners on the planet. When the base metals technicals look highly
favorable for going long again after these corrections mature,
we are planning to redeploy into elite base metals stocks in
a big way. When the appropriate time comes, we will outline and
recommend these actual trades in our newsletters
for our subscribers. Please subscribe
today so you don't miss these coming major buying opportunities!
In addition to exclusive access to what we decide to trade and
when as these coming base metals interim bottoms materialize,
our subscribers also gain exclusive access to the large selection
of private charts on our website. This collection includes large
high-resolution versions of base metals technicals charts that
are updated weekly so you can follow the progress of these ongoing
The bottom line is most of the base metals, regardless of how
wildly bullish their fundamentals may be, simply grew far too
overbought in May. A flood of new speculative capital drove the
metals up, parabolic in some cases, to crazy levels that are
not sustainable over the short term. All bull markets flow and
ebb, and the base metals are no exception. Their latest ebbings
But on the bright side these corrections will ultimately lead
to the best buying opportunities in the base metals and base
metals stocks since last summer. As these metals' histories show,
even short-term parabolas and their aftermaths are not a threat
and will not derail long-term secular bulls driven by global
structural deficits in metals production.
Adam Hamilton, CPA
June 9, 2006
Thoughts, comments, or flames? Fire away at firstname.lastname@example.org. Due to my staggering and perpetually increasing e-mail load, I regret that I am not able to respond to comments personally. I will read all messages though and really appreciate your feedback!
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