There is an age-old question asking: How do you determine if a trader is biased? Show him a chart and ask where he thinks the market would go and then show him the same, but reversed chart and if the answer is the same, then this trader is indeed biased. We call such a trader a Perma-Bull or a Perma-Bear. The market sentiment is often split even as there are a lot of biased traders and market is then trapped within a range as there is no dominant opinion among the participants.
Every day I see how the trading community spreads opposite signals in any instrument creating an overwhelming sea of information where it’s hard for novice traders to focus and make a trading decision. Different levels of experience and fantasy generate the diversity of chart patterns and models. People change time frames and squeeze or expand charts; all of this affects the perception and therefore, the final decision.
Let’s perform an educational experiment with two patterns that I found on different time frames for the same instrument, copper. I will add two separate charts with those patterns followed by explanations. I am eager to see what you think about the outlook for this instrument after reading and voting on the pole at the end of the article.
Chart 1. Copper Futures Quarterly: Head and Shoulders?
Chart courtesy of stooq.com
On the quarterly chart, there are three tops located on different levels, and the central peak is the highest. This sequence usually shapes the Head and Shoulders reversal pattern. The main focus should be on the black Neckline, which is drawn across the bottoms of the Left Shoulder and the Head. The pattern will be validated on the breakdown of it around the $2.2 level.
The height of the Head is too large to apply it on the breaking point of the Neckline to measure the downside target, according to the classic rule, it will be a negative number. Instead, I set the base, where the strong move up started, as a target at $0.6 level (price scale is in US cents).
It is a Bearish pattern with a catastrophic outlook for copper. Now let’s see the model of the opposite view below.
Chart 2. Copper Futures Monthly: Triangle?
Chart courtesy of tradingview.com
On the monthly chart above one can see the same pattern, which I highlighted with orange converging lines for you. It is a Triangle, which represents a large consolidation and acts as a junction between the AB and CD blue upward segments.
It’s ironic that we should watch the same downside support that was a Neckline on the first chart as the price could dip there, but this time, given the bullish bias of this model, we would expect the copper price to bounce off it.
The target is set near $6 at the $5.7 level where the CD=AB. The confirmation would come with the breakup of the former top beyond $3.32. The invalidation will be triggered on the drop below the earlier valley of $1.94.
This is a Bullish model as the price would more than double.
If neither model is right for you, please comment below sharing your view/link as every single opinion matters.
INO.com Contributor, Metals
Disclosure: This contributor has no positions in any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.