Chart of the week: Is this miner gearing up for a major bull run?

By John C Burford, author of Tramline Trading, and editor of MoneyWeek Trader

In these weekly articles, I will highlight a share that I believe has an interesting chart pattern. I am primarily a technical trader and use the methods I have developed that I call Tramline Trading. You can read more about my methods in my book Tramline Trading, which you can inspect here.

Most traders and investors make classic errors by chasing a stock near a top and then hang on to it too long during the decline. You will vastly improve your performance by timing your entries and exits more expertly - and that is what I hope to help you with.

My goal in these articles is to cover a share that has an interesting chart. I I developed my tramline system over several years to give me a set of rules which can provide me with trade entries at low risk. The low risk requirement was crucially important because no matter how firmly I believe in my trade, I could be wrong! And I wanted my wrong trades to hand me the smallest possible loss to my account. I figured the winners would take care of themselves.

My hope is that you glean useful ideas and employ at least some technical analysis to bolster your returns. In trading as well as investing, timing is a key factor in your eventual returns.

Glencore in rally phase

As a former commodity guy, I have an abiding interest in the whole world of commodities. In fact, I cut my trading teeth in commodity futures well before the internet age by trading the wheat, corn and soybeans futures (and pork bellies!).

The gigantic futures markets we have today in all areas of economic life had their genesis in the primitive agricultural futures markets of the mid-West USA. The oldest futures exchange in the world - the venerable Chicago Board of Trade - was established in 1848 in order to offer forward price discovery to the farmers and processors of wheat and other grains and produce.

And that is their primary function even in today's sophisticated futures and options markets. We are the speculators who provide liquidity to the commercial interests - and seek to profit from price movements, of course.

In fact, although much derided - primarily by politicians looking for scapegoats - the speculators fill this vital liquidity function, and the markets would not be as efficient without them.

The invention of the standardised futures contract between buyers and sellers was a landmark in commerce, and allowed the development of large-scale ventures, such as Glencore, to grow by being able to shift price risk to others in an operation known as hedging.

The futures market is the market

Today, it is the futures markets that drive all other markets, rather than the cash (spot) markets. And commodity firms use futures extensively to balance risk. And when there are no futures markets available - such as with iron ore - forward contracts are employed.

I should add that the producers also engage in speculation over and above their necessary hedging activities.

With the recent collapse in commodity prices, commodity companies have suffered mightily. I have recently covered the major gold and silver miner Fresnillo, which had been a bombed out share - until recently.

Today, I want to examine Glencore to see if this is also a candidate for a recovery play or merely a share to short.

This is the daily chart going back to 2011 and it has several noteworthy features:

In general, the share price has tracked the value of the US dollar - as have commodity prices. And the share plumbed record low depths of 240 in mid-January, just as the dollar was making a major top.

Commodities have since rebounded - in some cases very strongly - especially crude oil, and Glencore has followed to today's 280 print.

Dead cat bounce about to reverse?

The big question is this: is this a dead cat bounce, or the start of a major bull market in commodities and hence in Glencore?

Let's zoom in on the latest wave down off the summer 2014 high for clues:

I have placed Elliott wave labels which I believe are the most appropriate. Wave 3 is long and strong (weak momentum at wave 3 low).

I also have pretty good tramlines (see text, pp 22-26, 48–52) drawn.

Outlook

If the market can rally up to the upper tramline and decline from there, that will be wave 4 in place, leading to new lows in wave 5 down. This morning, it has made a Fibonacci 38% retrace of the entire wave down. This is an area of resistance, so the market could make its turn from here.

Momentum is currently over-stretched so odds are that the rally should at least pause here.

There is no doubt that markets in commodities and the producers have been heavily short and this extreme bearishness is currently being worked off by a massive short squeeze. Whether there is more short squeezing to be done is an open question - after all, US crude has rallied from $44 a few days ago to $54 - a very sharp jump of over 20%.

That has tempered the bearishness of even the most ardent bear, surely?

In crude oil, there is a massive short interest. Here is a revealing chart:

That is one heavy bet on crude oil collapsing! I wonder how that will work out for them?