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The Morning Line

Is Copper Signaling the Return of Inflation?

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I’ve been a hardcore deflationist for so long that it took a wake-up call from the always astute Jesse Felder to jolt me out of my complacency. His latest report is headlined Dr. Copper Could Soon Deliver a Diagnosis of Inflation, and it’s an eye-opener. The chart accompanying Felder’s think-piece suggests that copper futures have been developing thrust for the last several years that could launch a steep rally. He uses a pennant formation to show this, and the breakout point on his chart would come at around $2.95 per pound if it occurs this month. I have illustrated his pennant in the chart above with red lines.

My perspective is somewhat different and uses the Hidden Pivot Method to extrapolate a breakout at exactly $3.12 per pound. Any higher, especially if the futures can close for two consecutive months above that price, would be very bullish. But even someone with no knowledge of technical analysis can see that all signs point higher, with many uptrends of varying degree in play simultaneously. My technical runes say that a strong breakout to the upside would have the potential to push the price of a pound of copper as high as $5.33. If so, the corresponding inflation we might expect to see in the price of goods and services would be severe and a jolt to the global economy, especially since inflation has lain dormant for nearly 40 years.

‘The Doctor’ Is Usually Right

Concerning copper’s ability to predict inflation, I’ll let Felder explain:  Traders call copper ‘Dr. Copper’ because he has a Ph.D in economics. In fact, most of the time, Dr. Copper forecasts recessions and recoveries, inflation and deflation, far more accurately than his colleagues in the ‘dismal science,’ so it pays to pay attention to his macroeconomic messages.  Just so.  And although I continue to believe that a deflationary endgame for the global financial bubble is unavoidable, if copper were to bolt sharply higher I would have to concede that the deflationary bust I’ve been anticipating for so long may lie further down the road. Regardless, the potential for a catastrophic outcome, presumably but not necessarily deflationary, would remain. That’s because steep inflation would push interest rates high enough to implode the global debt bubble, a quadrillion dollar credit edifice that is fatally addicted to low rates and which could not adjust to a sudden, 100-basis-point upthrust, let alone entrenched rates of 5% or more.

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$+AAPL – Apple Computer (Last:313.83)

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$DIA – Dow Industrials ETF (Last:291.54)

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$ESH20 – March E-Mini S&P (Last:3304.00)

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$GCG20 – February Gold (Last:1552.40)

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The futures recovered somewhat after getting knocked down midweek, but not before they’d impaled a 1592.80 midpoint resistance tied to a bull-market target at 1732.50. Odds of reaching so optimistic a benchmark would shorten if the monthly bar finishes above the 1592.80 midpoint pivot. There’s little value in speculating about this now, but if the futures pull back to the green line at 1523.00, that would trip a moderately appealing ‘mechanical’ buy signal we can leverage in several ways. For detailed guidance in real time, tune to the chat room if weakness brings the February contract down another $30 or so. _______ UPDATE (Jan 14, 10:05 p.m.): Buyers have come back to life with a bounce precisely from the midpoint Hidden Pivot support shown in this chart. The rally will become interesting if and when it exceeds C=1564.10 of the pattern shown, wrecking the short-term-bearish look of the lesser charts.

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$+TSLA – Tesla Motors (Last:498.03)

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$GDX – Gold Miners ETF (Last:28.25)

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$DJIA – Dow Industrial Average (Last:28,907)

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The Indoos dove more than 300 points last week after topping at the precise intersection of a well advertised trendline and an important Hidden Pivot target. The two obstacles together represented the most formidable technical challenge bulls have faced in more than a year. Ordinarily we might expect a correction lasting at least four to six weeks. But these days, four to six days of weakness seems more likely, given the relentless enthusiasm of buyers and the very narrow list of stocks on which they have trained their buying power. So where to next?  I’d suggest using a 30299 target for now. It comes from the weekly chart and is the secondary (p2) Hidden Pivot of a rally pattern begun from A=15,503 in February of 2016. _______ UPDATE (Jan 7, 10:10 p.m.): Before tonight’s selloff I’d assumed last Thursday’s slight penetration of a very strong trendline was bullish. I still think so, albeit with somewhat reduced confidence. The trendline itself is as clear and compelling as they come, and that’s why I think the pop above it holds bullish implications. Here’s a chart that shows it. _______ UPDATE (Jan 8, 9:34 p.m.): The Indoos popped above the trendline again before settling about 80 points below it. If they can close for two straight days above the line, look for more upside to at least 29,299. That Hidden Pivot comes from the following coordinates on the daily chart: A=27,801 (12/11); B=28701 (12/27). Please note as well that p2=29,059 could offer resistance that would potentially be tradable. ______ UPDATE (Jan 13, 5:40 p.m.): Remember that scene in Mars Attacks! where the U.S. military, having failed to stop the aliens with missiles and cannons, explodes a nuclear device in outer space near their spaceship? An alien sucks the mushroom cloud into his lungs like some stoner inhaling vaporized marijuana from a bong, and then he lights up with drug-addled delight. Well, the INDUs have performed a similar feat, turning what had appeared to be an all-but-impenetrable trendline into support. Here’s the graph, and there’s no point in wondering any longer whether the 29,299 target will be reached.

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$DXY – NYBOT Dollar Index (Last:97.36)

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I’ve been steadfastly bullish on the dollar for years, in part because a strong dollar is congruent with the deflationary endgame that seems likely when the stock-market bubble bursts. Even so, it’s conceivable we could see an inflationary blip along the way, especially under a president who seems determined to weaken the dollar to help U.S. manufacturers.  The intermediate-term chart (inset) therefore bears watching, since it could provide us with evidence that the dollar weakness since early October is about to intensify.  Despite Friday’s robust bounce from the trendline, I expect a relapse to reach the target. If it breaches it, and especially if the downtrend goes on to exceed June’s low at at 95.84, that would be the first yellow flag we’ve seen in the greenback since August 2017.______ UPDATE (Jan 1, 3:50 p.m.): Yesterday’s low slightly exceeded the 96.40 target shown in the chart. (I somehow failed to mention this target in the tout when I published it two weeks ago.) The bounce so far has been fleeting and feeble, hinting of still lower prices to come. ______ UPDATE (Jan 7, 10:38 p.m.): Heightened tensions with Iran have given the dollar good reason to rally, and yet it is barely getting any loft from the 96.40 Hidden Pivot noted above. This is plainly bearish and will remain so unless the crisis escalates significantly. _______ UPDATE (Jan 13, 5:55 p.m.): DXY’s rally has lengthened modestly since the 96.40 bottom was in, but bulls will need to surpass 97.94, where a small ‘external’ peak was recorded Dec 2 on the hourly chart, for the uptrend to gain credibility.

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TNX.X – Ten-Year Note Rate (Last:1.933%)

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Although some notable long-term bond bulls are close to throwing in the towel as U.S. Treasury yields continue to climb, the chart suggests the bull market begun nearly 40 years ago still has farther to go.  Yields on the long bond settled Friday at 2.41%, up from 1.90% in August, while T-Notes have gone from 1.43% to 1.93% over the same time. The rallies have been impressive if not to say scary, since they have subjected hundreds of trillions of dollars of borrowings to a deflationary turn of the screw. The burden of debt promises to lighten before it becomes fatal , however, when the uptrend in interest rates reverses.

Is This a Good Thing?

Hidden Pivot analysis says relief could come soon, with the 10-Year topping at 1.984% and the 30-Year at 2.477%. How far might they fall thereafter?  My forecast calls for major lows at, respectively, 0.84% and 1.64%. This implies that the negative-rate weirdness of Europe will not afflict U.S. debt. Is this a good thing? Don’t ask the ‘experts’, because they don’t understand negative yields any better than the news media hacks who write about it.  Sub-zero yields reflect the central banks’ increasingly desperate efforts since the 1990-91 recession to avoid a catastrophic deflation. Predicting they will fail is not exactly rocket science, even if not one observer in a hundred expects this.

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