A very interesting setup in both copper and bonds seemed to have telegraphed the collapse in the U.S. stock market in early 2020. T-Bonds, which had been consolidating into a downward price channel prior to the COVID outbreak, suddenly broke through the downward price channel and started to accelerate higher. Copper, which is a fairly common commodity for building, infrastructure and other uses, had been moving higher above a clear upward price channel, then suddenly broke lower in early 2020. Both bond and copper seemed to break these price channels nearly 20+ days before the U.S. stock markets initiated their price decline on Feb. 24, 2020.
My research team and I believe this setup is not inconsequential for technical traders. The breakdown in copper represents a core “demand” failure, while the breakout in bonds suggests risks are elevating. This is something we should continue to watch for in the future as copper and bond prices typically move before the U.S. stock market begins to react.
The 2020 Copper/Bonds Divergence Setup
The following daily chart showing the setups and breakdowns/breakouts of the Dow Jones Industrial Average, copper and bonds clearly show the early breakout in bonds and the subsequent breakdown in copper – nearly 20+ days before the Dow began to breakdown and accelerate lower.
It makes sense that bonds and a highly utilized commodity like copper would reflect a change in demand or elevated fear just before a contagion event takes place. Consumers, manufacturers and builders, as well as traders and investors, were all able to see the writing on the wall in this case. Will any future contagion event be similar? Will copper and bonds react to fears and demand concerns 10 to 20+ days before the next downside price event?
The Current Copper/Bonds Setup (Still Bullish)
Currently, the U.S. markets are in a bullish price phase. We've written extensively about how the markets are experiencing an unprecedented bullish/rally phase, which we believe to be a euphoric/speculative phase of the broader trend. Still, one can't ignore the strength and momentum behind this current bullish trend and take a pessimistic view of the markets.
The current Dow, copper and bonds chart, below, highlights the strength and momentum of the current bullish Dow price trend. Even though bonds appears to be very close to the downward sloping price channel, we have yet to see a real upside price trend in bonds, which would indicate fear has started to reengage in the markets. Additionally, copper is trading solidly above the upward sloping price trend, which suggests demand for copper is still quite strong.
As long as the bullish trend continues, we would expect bonds to continue to consolidate below the downward sloping price trend and continue to drift lower while copper continues to stay above the upward sloping trend line suggesting demand is strong and future expectations have not changed.
When and if bonds move above the downward sloping trend line, then we have to watch copper very closely for a breakdown event. If we see this take place quickly (within a 5- to 7-day window), then we need to start to prepare for a broad market decline that may happen within 10 to 15+ days of the bonds/copper trigger date.
The arrows on the current chart above show you what would happen if a new contagion event were to happen and if the copper/bonds set up replicates itself. Bonds would begin to rally, copper would begin to decline, and about 15+ days later, the U.S. stock market would begin to decline.
Again, we believe this setup may be a good way to determine a change in expectations related to the demand for an industrial commodity (copper) and risk levels related to debt/credit (bonds) that may trigger a warning before the major markets change trends. If our research is correct, and the copper/bonds markets react to changing expectations before the broader U.S. stock market reacts to the change in sentiment, then this may be a very valid setup for skilled technical traders to stay ahead of the major market trends.
To be clear, the markets are currently in a strongly bullish price phase. We are not calling for a top or any type of major downside rotation based on this setup today. We are showing you what happened prior to the 2020 breakdown and suggesting something similar may happen in the future – which may allow you to have an early warning of a major U.S. stock market reversal in trend.