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Base Metals are Gaining Traction Reflecting a Strong Economic Backdrop

David Becker
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www.iforex.com

Generally a pickup in economic activity is coincides with strong base metals prices as construction activity increases. Base metals are attempting to form a bottom and a recent reversal pattern could give base metal bulls the ammunition they need to generate momentum behind these growth-oriented metals.

The Base Metals ETF (DBB) continues to challenge resistance as an inverse head-and-shoulders pattern takes shape. The DBB consists of relatively equal parts of copper, aluminum and zinc. The chart of the DBB shows an inverse head-and-shoulders forming over the last four to five months. This bullish reversal pattern can be confirmed with a break above neckline resistance.

The ETF is currently challenging resistance in the 16.4-16.6 area, which can be considered neckline resistance. Also notice that the falling 200-day moving average and February-April highs mark resistance here. A breakout at 16.6 would validate the head-and-shoulders and target a move to the 17.5 area. The height of the pattern is added to the neckline breakout for an upside target.

A breakout in DBB depends on strength in two of the three holdings. According to the International Zinc Association (zinc.org), 58% of zinc is used to galvanize steel, a process that protects against corrosion. Zinc in an uptrend after the breakout in December. The metal broke above the resistance zone in the 1925-1950 area and this zone turned into support with two successful tests this year. Zinc is currently near its prior highs and shows more strength than weakness.

The subsequent rebound in copper retraced 50-62% of the prior decline and the metal broke trend line support with a sharp decline last week. This decline reinforces resistance in the 3.18 area. A break above the May highs is needed to reverse the downtrend in copper.

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