A downward breakout now could lead to sustained moves lower

In December, we presented a bearish scenario for copper based on classic Elliot wave analysis. Also, because copper is a bellwether for economic activity generally, we suggested that lower prices for copper might forecast a slowing of the global economy and a decline in stock markets. That outcome would be consistent with our view that most western stock indices appear to be completing top formations.

Now, three months after our initial article, copper could be on the verge of confirming (or invalidating) our suggestion that it has been tracing a bearish triangle formation since mid-2011. Below, we describe the signs to watch for, as well as potential targets if the triangle scenario unfolds.

In December, we asserted that price would have to stay below 3.8525 in order for the triangle scenario to remain plausible. The updated weekly chart, below, shows how since that time price has tested and retreated from the ideal triangle boundary while staying below the upper limit.

If we are correct that a bearish triangle was complete at the point labeled '[e]', at the 3.8090 price level, then price should have begun tracing a large impulsive wave downward. The initial down-move shown on the weekly chart might be part of wave '(i)' of that move.

In turn, wave '(i)' should be the first of five waves to complete an impulsive 'C' wave into lower price targets. The first likely target would be around 2.75, based on a C=0.618A measurement.

The daily chart, below, offers a closer look at what could be a developing wave '(i)' of 'C'.

On the daily timeframe, copper might be in the process of completing a wave '(i)', consisting of five smaller waves in an impulsive arrangement. If wave '(i)' is finished, then wave '(ii)' should arrive as a bounce, which could be either a shallow or deep retracement. In any case, wave '(ii)' must not exceed the high of February 4th in order for the scenario to remain intact. More likely retracement levels would include 3.5515, 3.6015, and the area around 3.6800. A concurrent signal that an upward wave '(ii)' is completing might come from the commodity channel index indicator shown at the base of the daily chart. It should approach and possibly test/poke through the zero line before falling away again.

If price fails to break below 3.4335 on this push, then there is a possibility that the triangle could become larger, with the present low as the new '[d]' of the triangle and an upward wave '[e]' up yet to take place before a breakout of the converging range.

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