A Market Sniper Long/Short Commodity Trade Idea

The Short end of the stick – Copper

Trade idea hypothesis – Copper is a sell through to below $260.

Copper, in unison with the Precious Metals mining universe has had an exponential run since 2001 from its lows of $50.23

In 2011, unlike most of the other precious metals universe, it exceeded its all time closing high of $ 427.81 that was set in 2008. To truly get under the skin of an underlying market, undertaking a good macro to micro assessment usually renders up price secrets.

The key is to look for familiar areas where legacy price behavior and its DNA volunteers clues, a few of these areas are:

1. The Markets (Peoples) response to key round number levels

2. Key Levels of Significance (KLoS) – a key element of my proprietary ‘Hunt Volatility Theory’ – these are also horizontal levels, but may often pass through the price behavior, yet be shown to be significant.

They take more practice to notice than the more obvious Support and Resistance levels but are far more powerful on occasion.

Support & resistance levels in the real world are often just run before reversing and so killing the S&R trader (also known as Bull & Bear traps). This makes Support & Resistance useful although not always the best trading strategy.

A monthly History of Copper since 2001 to present

Take a look at the chart above to see how the early part of 2006 saw a complete one sided demand overrun for and a consequent ‘melt up’ from the $225 levels right through to the $400 level within 10 weeks.

So, for our Macro View in the chart above, we had our first Inverted HVF setting up over the months of June/July/August/Sep 2006. This saw a break out at the RL3 level of $335.00 and where the stop loss on a really narrow funnel would have been at $340.15.

Broadly, the set up formed around the $350 Level as a Key Level of Significance after the melt up and incidentally, this is now almost the identical entry levels are set up for our current pattern for its short entry level and Target

The first Major Inverted HVF in 2006 and its significance for key Levels of Significance (Weekly)

Weekly history of the $350/$340  – $260/$250

See the role these levels played in the subsequent price action above, moving through the triple top and Head & Shoulders?

This brings us to our current set up.

The Weekly Inverted HVF

The last high of Early 2011 topped at $464.95 then reversed strongly as illustrated in the red arrow above right down to the L1 point at the round number level of $300.

Note how the final upswing to RH3 lacked the impulsiveness of the previous up legs to RH1 at the $400 (another round number). Its price action was similar to the weak channel found in Bear flags.

8 Hour HGK3

We spilled out of the channel with big gaps in early February and in unison with highly impulsive selling candles – the bid was virtually entirely pulled. The alert trader may even have taken this channel breakdown short entry as high up as $370.

The Inverted Hunt Volatility Funnel on the Daily timeframe was triggered on the 28^th March 2013, Its loss stop is $380 (Red Dashed line), however a high number of shorter timeframe set ups have occurred that could now allow a loss stop of $360, $357, $349 depending on risk and sizing sought.

The Target sought is $260 with the market currently at $335 . My stop is $350 and so I am taking a $15 risk for a $75 reward which means an attainable 1 : 5 Risk to Reward ratio.