Originally published March 8th, 2009.
Something truly remarkable happened last week that has major implications for the global economic crisis - despite all the doom and gloom and the broad stockmarket continuing to make new lows, copper broke out upside from a 3-month long base pattern. Why is this so important? - because copper has a history of being one of the earliest if not THE earliest lead indicators for the world economy, so much so that it is sometimes called Dr Copper. So what happened? - let's take a look on a 6-month chart.
On the copper chart we can see that on Wednesday it broke out from a bullish Ascending Triangle, which itself is part of a strongly bullish Pan & Handle base pattern, and the breakout held, with the price picking up again on Friday after reacting on Thursday. Fundamentally a reason for the improvement was that copper inventories at LME warehouses have declined by 23,000 tons over the past two weeks, which is the first significant drop in about 9 months. Copper inventories in warehouses in Shanghai are at their lowest levels for a decade and China is now buying heavily - and we should not forget that China's economy is still set to grow by about 5% this year, global economic crisis or not. We detected the accumulation pattern in copper over a month ago, when a breakout alert was issued on the site . The recent action in copper is one of the first, if not THE first indications of eventual global economic recovery and is thus the source of the first light at the end of the tunnel for the battered and bloodied businessmen and politicians of the world that the worst may soon be over.
The great news is that it is not just copper - the world's most important commodity, oil, is following hard on copper's heels, as it appears to be on the point of breaking out in a similar manner. As we can see on the 1-year chart for Light Crude, it is just starting to emerge from a basing pattern that is remarkably similar to that of copper. The sideways action from the late December low has resulted in it breaking out from last year's extraordinarily severe downtrend. This sideways action has taken the form of a converging Symmetrical Triangle, from which the price has already broken out about 2 weeks ago, and the only reason that it hasn't taken off higher already is that it is being held in check pending the resolution of the banking and financial crisis, which as we will shortly see is now in the acute terminal phase demanding resolution, and which is currently inflicting heavy damage on the stockmarket, and in addition, of course, many market participants simply don't realize that OIL HAS ALREADY BROKEN OUT upside. From a trader's standpoint it couldn't be better as oil has already broken out technically, but has not started to advance yet.
Alright, so having established that 2 of the world's most important commodities, Dr Copper and oil, are pointing to economic recovery, or at the least a significant easing of the crisis even if it later proves to have been a passing phase, our job is to reconcile these observations with the still plunging banking and financial sectors and broad stockmarket.
Anyone who understands Catastrophe Theory will, looking at the above chart for the Philadelphia bank index, instantly recognize that we are fast closing in on a cuspal catastrophe. The crisis is already well into the acute phase and getting worse by the day, and the worse it gets the greater is the demand for resolution, and the more drastic and fundamental the measures that will be required to end it. Since the big banks and other major corporations and institutions at the heart of the crisis do not have the financial wherewithal to survive it and are deemed by society, or at least by the the elites running the world, to be "too big to fail", there can only be one outcome - massive across the board full or near-full nationalisation of the afflicted entities, possibly involving mega-mergers, such as Bank of America merging with Citibank. This means in effect a "super bailout" that makes what we have seen to date look decidedly modest, and also means that the taxpayer will end up footing the bill for the misadventures of these companies for years to come. What about the derivatives mountain, which Bob Chapman has famously labelled the "Quadrillion Dollar Derivative Death Star" - won't that bring the system crashing down anyway? The derivatives problem is so astronomic in scale that there is only one solution to it - you simply tell all the counterparties involved to get lost and that they are not getting their money. Most of it is fictional anyway - there is not that much money in the world, so these contracts can never be honored in any event. So you wipe the slate clean and it's "tough luck" for anyone who doesn't like it. This is not just what will probably happen - it is the ONLY solution. The interesting thing is that our chart makes clear that resolution of this crisis is imminent, for the sector is accelerating on the downside into vertical freefall - meaning that we must see either mass bankruptcy or super bailout within about 2 months. As mass bankruptcy would result in societal breakdown that only leaves super bailout as an option, which is the outcome that the action in the copper and oil markets points to.
It should come as no surprise that the accelerating parabolic collapse in the banking and financial sectors is leading to exactly the same phenomenon in the broad stockmarket, where a similar parabolic downtrend is leading the market into the abyss. The market is already extremely oversold so that when the drastic measures are announced that mark the onset of the resolution phase a massive rally is to be expected that will be given a huge boost by panic short covering. This rally will be coincident with a recovery in the banking and financial sectors with the chart similarly suggesting that it will occur within 2 months, possibly much less. Once this happens base metal stocks and the oil sector will soar. We will later be examining the impact of these developments on the Precious Metals sector.
