Copper(x2)/Gold Spread: Revise the Revision!

Getting Cute

Currently, the blog is working an order to buy the December copper(x2)/gold spread if it makes a two-day close above the declining 100-day Moving Average.  The spread hasn’t made a two-day close above the declining 100-day MA in nearly a year, so we’re assuming it would signal a bullish trend change. That’s why we’ve been willing to throw our hat in the ring and get long if it happens.

However

We’re going to get cute here and put on a long position right now.

The reasons for buying in right now are two-fold.

December Copper (x2) Gold spread daily (double bottom)

December Copper (x2) Gold spread daily (double bottom)

First, it appears that a double bottom-type pattern may be forming.  The December copper(x2)/gold spread made a contract low at -$24,105 on February 11th and rallied.  It then made a slightly higher low at -$23,645 on May 18th and is starting to rally again.

Copper (x2) Gold spread weekly

Copper (x2) Gold spread weekly

Secondly, this is currently only the third time in nearly half a century when the copper(x2)/gold spread has traded to -$20,000 or lower, basis the nearest-futures weekly chart.  Now, we’re not necessarily going in just because the spread breached the -$20,000 level.  We’re making our move because of how long this spread has been held underwater.

Copper (x2) Gold spread (1980-1981) weekly

Copper (x2) Gold spread (1980-1981) weekly

On the weekly timeframe, the spread first closed below -$20,000 in late June of 1980.  The last time that it closed below -$20,000 during that run was sixteen weeks later in early October.  It didn’t return to the -$20,000 mark again until the great Financial Crisis of ’08.

Copper (x2) Gold spread (2008-2009) weekly

Copper (x2) Gold spread (2008-2009) weekly

During the worst financial period in most of our lifetimes, the copper(x2)/gold spread finally closed back under -$20,000 in the second half of December of 2008.  It then chopped back and forth for a bit as the bottoms for many markets were being established.  The last time that it closed below -$20,000 in this timeframe was nine weeks later in mid-February of 2009.  The spread then staged a two-year bull market as it ripped over $123,000 higher!

Copper (x2) Gold spread (2015-2016) weekly

Copper (x2) Gold spread (2015-2016) weekly

This brings us to the current bear market.  The copper(x2)/gold spread first closed below -$20,000 (on the weekly nearest-futures chart) in the second week of February.  Despite a couple of good rally attempts into late March and late April, the gains didn’t last.  The spread once again closed out the week below -$20,000 just last week.  Now, if you apply a complex mathematical algorithm known as counting, you will discover that this has been a fifteen-week duration that the spread has been down here.  If the nearest-futures spread backs off just $650 by tomorrow’s close, it will match the sixteen week stretch from 1980.  So it seems to me, dear reader, that time may be running out for the bears.

As an added bonus, did you happen to notice that the second weekly low in the 1980 market was slightly lower than the first weekly low

And that the second weekly low in the 2008/2009 market was slightly lower than the first weekly low

And that the second weekly low in the current market is slightly lower than the first weekly low?!

Gee, it’s starting to look like a pattern here.

Then What

Based on the above argument, we’re going to plunge into the copper(x2)/gold spread right here.  But in the event that we get punished for acting on our deep market revelations and get stopped out, the blog will simply return to the original plan of getting long on a two-day close above the declining 100-day MA.

In the event that we do get it right, we’ll be looking to take full advantage of the situation by adding to the position, i.e. pyramiding, as the new bull market unfolds.  Since the 100-day MA is so close by (currently around -$14,580 and dropping), it seems that using a two-day close above it would be too quick for an ‘add-on’ position.  So we’ll watch for a breakout above resistance between the March 28th high of -$9,535 and the April 22nd high of -$9,625 for a green light to add more spreads between the red metal and the yellow metal.

Trade Strategy:

Cancel the hypothetical order to buy the December copper(x2)/gold spread on a two-day close above the 100-day MA.

Place a new order to buy two December copper contracts and simultaneously sell one December gold contract at a spread of -$18,000 or better.  Initially, the spread should be liquidated on a two-consecutive day close below -$25,000.

If stopped out, place a new hypothetical order to buy two December copper contracts and simultaneously sell one December gold contract if the spread between the value of the sum of two 25,000 lb. copper contracts and the value of one 100 oz. gold contract makes a two-day close above the 100-day MA.  Exit this spread on a two-consecutive day close $500 below the contract low that precedes the entry.

 

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