October 13, 2004
Copper prices suffered the largest one day decline ever today as prices collapsed from 16-year highs. Copper earned its useful nickname "Dr. Copper" over the years due to its ability to forecast the state of the economy and particularly the ebb and flow of the equity markets. So the first thing that came to mind is, "What is Dr. Copper saying."
*Copper boasts a terminal "five-wave" Elliott Wave pattern, indicative of a top. This week's high also formed a Fibonacci relationship with the June lows being the 38.2% retracement of the 2001 to 2004 rally.
Well, one thing it said today is that falling raw material prices, including oil, are not necessarily a boon for the market. Seeing that small cap stocks reached a new all time high last week alongside the 75% rise in crude oil over the past year, we have repeatedly stated there is not a particularly strong inverse correlation between oil and stocks. Moreover, one of the reasons the averages were down so much today is because the companies that have done so much to help lately are the raw materials producers. In fact, energy and materials groups accounted for over 60% of the decline in the S&P 500 today.
Now consider for a moment that the Dow Industrials has struggled mightily to hold onto the psychological 10,000 this month even though the Dow Transportation average raced ahead as the dockyards and truckers worked at breakneck speed to unload our trade deficit and ship it across America. This divergence is unhealthy, so perhaps another thing Dr. Copper is saying is that this latest rally in the equity markets is not to last?
Recall that on Monday we issued a call that if the Dow failed to hold the 10,000 level we would turn bearish, positioning ourselves to sell the highest flyer - the S&P 600 Small Caps. Moreover, we initiated our position today in what we alerted subscribers this week as being the "October Surprise." It's potentially the best trade we've seen all year and works as a hedge for investors long commodities and short the dollar. (We're giving this analysis idea away for free this month to anyone who signs up for a one week free trial to any subscription service).
Bottom Line: Today the Dow Industrials convincingly broke below its uptrend line connecting the March 2003 and the August 2004 lows. This line supported the September lows and crossed this month at 10,000. For that reason we feel today's downside break will see a large increase in selling pressure in the weeks to come.
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