Written for Business Standard
December 14, 2011: Copper is consolidating with a bearish bias that has negative implications on the global equity markets. Equity markets often follow copper.

The copper index which was hovering at 364 at the time of writing this article is forming a symmetrical triangle.  (Click here Copper chart ) In a symmetrical triangle, price moves in a continuously narrowing range as buyers and sellers battle to give market direction, but fail. The narrowing range forms a symmetrical triangle when we connect the peaks and valleys in price.

A symmetrical triangle is a continuation pattern and since copper fell before it moved into a symmetrical triangle, one could see a further fall in the price of the metal. However, sometimes prices can reverse and move in the opposite direction and this will be bullish for copper. The direction price takes is confirmed only when prices close outside the triangle. As of now the prices are still inside the triangle.

If prices break down the triangle it can go all the all the way down to the 320 level, which is an area of support. Prices often rally from support levels and for the copper index the level is between 300 and 320. A look at the chart will show that copper prices had rallied from that level in the middle of 2010. If copper falls below that level it can go all the way down to the lower 200s.

The reason for the fall in copper prices is threat of a double dip recession and the monetary tightening by China and India. Both countries are huge consumers of copper. Tight money policies have curbed demand for the metal in both countries. Additionally, growth in the western nations are anemic and unable to offset the demand slack from China and India. We would hence maintain a bearish bias on copper.

However, if the metal breaks to the upside of the triangle, we'd abandon the bear in favor of the bull. This is likely to happen too given the fact that China has paused its tightening and in fact began loosening monetary policy. In India too there are hints that the Reserve Bank may pause or reverse its tight money policy, given the fact that industrial output has fallen. A lower supply of goods coupled with high interest rates and inflation could result in stagflation in India. Lower supply will push up prices, which affects the inflation number. Given this scenario its felt that Reserve Bank may begin loosening monetary policy to stimulate supply, even at a risk of rekindling inflation.

These policy changes or even the anticipation of changes can lead to a rally in copper prices. Remember the rally that began in 2009 was sustained by loose monetary policy across the globe. It's when countries such as India and China began tightening and the US growth faltered that copper prices began to fall. 

However, based on the chart we'd not do anything with copper right now. It's best to wait for the break out before taking an investment decision.