11 Jul 2020 ● 04:00 PM
Metal stocks remain the top pick for the long term view of a reflating world. This week the falling dollar fueled a late week rally in commodity prices especially base metals. Copper prices went on to new highs taking its RSI to 85. Metals stocks in India did not do much though till Thursday. So here is a look first at the correlation of Copper with the Metals index. On a broad scale the 2 move up and down together. But in the near term like between all correlated assets there are inter market divergences [IMD] at some degree. So what we see here is that between 2006-2012 there were two major IMDs. the first saw Copper prices rally back to make a double top in 2008 when metal stocks based on the BSE Metal index went on to make new all time highs as the general stock market was running away. In 2011 we see the exact opposite. The falling dollar drove Copper prices higher to a new all time high but the Metals index made a double top only not surpassing even the 2008 high. As always inter market divergences precede market turns short term or long term depending on the degree of the divergence.
What we see recently then is that both recovered within a few days of each other in March. Now Copper has been moving up almost one way with a few corrections but inside a nice channel. So even with the RSI at 85 it is attempting to touch the top channel line at 2.99. Eventually it may go to the lower channel and then higher again as the broader trend is bullish for the metal. The metals index on the other hand has seen several consolidations and is in one right now that looks like a ascending triangle. But the recent rally has not led to a breakout in the metals index even though late this week metal stocks did get a bump up. A breakout above 7787 on the BSE Metal index would confirm that a new wave started in metal stocks and we could get a powerful rally then. But till then we may continue to consolidate in this trading range as we are close to the weekly Bollinger band a key resistance that needs to be broken as well. In the short term we have a divergence where copper is making new highs and we just need to see when stocks start catching up.