The movement in the price of spot copper and the movement in the Dow Jones Industrial Average (DJIA) are very highly correlated. That means they generally move higher or lower in tandem.
There are, however, periods of divergence and those periods can provide a trading edge.
When a stock is moving higher but the MacD indicator, for example, on the chart starts to move lower that is a bearish divergence. The stock would be expected to follow the indicator lower. Conversely, when a stock is making lower lows but, let’s say the RSI is making higher lows, this would be an example of a bullish divergence. The stock would be expected to catch up with the indicator.
Copper has been selling off since June this year after it broke the support line of a large horizontal triangle. The stock index has been consolidating under 25500, but making higher lows above a rising 40 week (~200 day) moving average. So, copper prices have been moving sharply lower since June, while the industrial index has been making incremental higher lows. This is a divergence between a normally correlated pair.
During this time the correlation coefficient, which tracks the relationship between the metal and the industrials, has moved below its center line. This is a reflection of the disconnect between the two.
This week the DJIA broke above the 25500 level and closed on its high, forming a bullish hammer candle on the chart. Spot copper managed to move off its weekly low at $2.55, and close slightly higher.
The $2.60 area for copper is the downside measured move of the large horizontal channel pattern breakdown. It is also the 50% retracement level of the 2016 low in copper and this year’s high. It would be a logical place for a bounce in the metal and a bounce in copper would likely fuel additional upside in the industrial sector.
Continued strength in the DJIA will take it closer to new highs and that in itself could provide further upside potential. If copper starts to bounce off it recen lows, it could see even more rapid upside as the spot price reverts towards a more normalized correlation with the Dow.
Bottom line: copper should outperform in an environment of continued industrial strength.