Thursday, January 9, 2014

JJC Copper ETF Weekly Chart Bull Flag Versus Descending Triangle to Determine the Fate of Markets in 2014

The spaghetti in the chart above is very important. Copper (JJC is the copper ETF) is making a major decision and the ramifications on the broader market will be felt for months, perhaps a year, or two, or more, to come. Doctor copper is a key market indicator although all indicators are struggling nowadays since the Fed destroyed price discovery. No one really knows what any asset is worth anymore due to all the easy money. But, thinking back to more 'normal' markets of yesteryear; as copper goes, so goes the markets, and copper leads the stock market. One of the most amazing things in 2013, was how copper and commodities collapsed in the spring but instead of the stock market selling off, or at the least moving flat, equities catapulted higher all year long finishing the year at all-time highs. This is proof positive of how the markets are pumped by the Fed and other central bankers' easy money. The BOJ shock and awe in April 2013, where the yen was relentlessly beaten and bludgeoned, is what created the bulk of the rally in US stocks last year and also saved the European stock and bond markets. The Fed and other central bankers are the market. Markets are simply climbing a wall of Fed. The assumption is that the stock market has much fluff underneath, but no one knows how much.

Both the bullish and bearish outcomes are presented to make everyone happy--for now. It's like buying a lottery ticket where everyone is a winner--until the number is picked. Likewise, each side has a path forward, but copper will decide any day or week moving forward which side is the winner. The green bull flag is the bull hope. If the stock market deserves to be this high, and the global economy is running on all cylinders, and there is nothing but blue skies ahead, copper has to move higher. The huge demand in copper, sending price higher, will verify that manufacturing is strong and the two biggest users of copper, auto's and housing, is going like gangbusters, and the future is so bright you gotta wear shades, to paraphrase the classic Timbuk 3 song (perhaps you can borrow the Fed's rose-colored glasses). This outcome is the inflationary outcome that the consensus believes is destined to occur moving forward. Yields will move higher, stocks higher, copper higher, jobs will increase, businesses are doing better, tapering will have to accelerate by the Fed, but most analysts agree that this is a good problem to have since the long recession is truly over and the global economy is now fine. This outcome would vindicate the Fed and prove they chose the correct path over the last 5 years. Chairman Bernanke would be carried on the shoulders of economists and would receive a ticker-tape parade through the streets of New York as well as text book accolades for decades to come. The bull flag target is 79.

The bear case is exhibited with the red, pink and brown descending triangles. You can bring up a clean slate and project your own price targets for the patterns above but the pink target is 27, brown target 20 (the 2009 support), and red target is 8-11. The red target is the 'hey buddy can you spare a dime' worst case deflationary scenario (think 1930's). This is what Chairman Bernanke has desperately tried to avoid by his obscene money printing. A base line triangle failure at the 37-42 zone signals accelerated disinflation and deflation ahead. This is the outcome where folks do not have jobs to spend money, the unemployment problem is structural, companies continue to layoff even the skeleton crew, cash is king since prices will continue dropping into a deflationary spiral. You will not purchase an item today since you know it will be even cheaper next week. The price of copper and commodities collapse since there is very little demand. The global economy stalls and comes to a stand still. China may finally experience the hard-landing this year which would immediately decrease the need for commodities moving forward. In addition, warehouses are stacked full of copper, zinc and aluminum in shadow inventory. None of this is good. This deflationary style outcome with lower copper is the Great Depression outcome and it would signal that the Fed has failed with its grand 5-year experiment and actually made things far worse for the US. Chairman Bernanke would take the blame for bringing down the global economy with his Keynesian policies. Which of the two outcomes above do you think will occur? Copper will tell you the answer.

The indicators are stretching out into sideways triangles ready to make a decision very soon. Keystone's trading algorithm, Keybot the Quant, is currently tracking 40.30 as the bull-bear line in the sand from a quantitative analysis perspective (simply put, bad things happen to markets under JJC 40.30 while market bulls will be happy and celebrating above JJC 40.30). In the time it took for Keystone to type these windbag comments, JJC has dropped from 40.38 to 40.16 into the bear camp. This creates weakness in equities. Something wicked this way comes? Watch your wallet. As copper goes, so goes the global markets and economy in 2014. The bears step into the lead waving the deflation flag. This information is for educational and entertainment purposes only.  Do not invest based on anything you read or view here.  Consult your financial advisor before making any investment decision.

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