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Checking the channels

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In recent weeks, its been some of the telecom-related technology sectors that have been some of the stronger sector that have helped the NASDAQ Composite (COMPX) 1,392 -1.34% and narrower NASDAQ-100 Index (NDX.X) 1,043 -1.36% show some renewed bullishness and in yesterday's session have some of these groups challenging their relative highs of last week, while some other technology sectors still remain further below last week's relative highs.

While the bullish side of me is hesitant to touch one of these telecom-related stocks while the bigger service providers continue to cut their capital expenditures in order to drive some earnings to the bottom line, the bullishness in the telecom areas has been noted. Perhaps they are in their "trough quarters" as some CEO's believe.

One area that I look for some confirmation for bullishness is in the commodity markets. No, pork bellies have little to do with telecommunications, other than thinking 2-year-old bulls in the group probably feel like a piece of fried bacon. The commodity I'm talking about is copper. Sometimes known among "techies" as the super conductor.

December Copper Futures (hg02z) - Daily Interval

I will confess that I've been VERY skeptical of the rise in telecom equipment stocks in recent weeks. Many trade well below their longer-term trends, but the groups have shown some bullishness and have been quick to rebound after a daily decline of 7%, which seems to be a norm for the more volatile groups.

Copper demand is driven by a more robust economy and part of that demand for the metal comes from the telecom equipment sectors. It's true that fiber optics have become a competing source for transfer of data, but copper prices can still be a good way of tracking what type of demand there is for the product.

Tom Dorsey's point and figure site covers a broad range of commodities with its point and figure charts. Those that subscribe to Tom's site www.dorseywright.com or are trying out a two-week free trial may be monitoring the rather bullish commodity chart of copper, which has given, 1,2,3 consecutive buy signals, starting at the $0.68 level. Right now, the December contract has a bullish vertical count of $0.74, leaving limited upside room related to the bullish count.

However, as we "step out" and look at the March futures contract (hg03h), which would be the next quarter out, bullishness builds in the vertical count for that contract to $0.84, which would currently be negated if the contract were to generate a sell signal at $0.705, which I've tried to show on the above chart with a thick green line. This would be the level that the December copper futures chart above broke trend, retested on the pullback, then bounced to the recent high of $0.73.

This type of bullish action has me not only monitoring telecom equipment stocks with the idea that maybe, just maybe they are starting to see a "trough" quarter in the 4th quarter, but perhaps thinning out some of their inventory buildup over the past year and things may indeed be looking brighter for the group. If so, then that might make a case for renewed demand for copper, thus the rise in commodity futures price.

One way to perhaps play such a bullish scenario is with the world's largest copper producer Phelps Dodge (NYSE:PD) $29.66 -1.33%, but with a very cautious 1/4 or 1/2 position as unlike copper futures, shares of PD do trade BELOW their bearish resistance trend currently, but the bar chart of PD is shaping up and looks very similar to the above copper futures chart.

Phelps Dodge Chart - Daily Interval

Shares of PD look compelling for a potential trade early next week. I think the recent decline into $30 may well be option expiration related as there had been some large open interest at the $30 level as the stock fell to $23.09, but an upward surge from the lows had a lot of hedges at $30 getting a bit sideways, and I think the stock settles back into that level near-term. I'm looking bullish 1/4 or 1/2 position next week on a move back above $30.00 with a two-month target of $35 and should copper prices reach their May contract bullish count of $0.84, the PD to trade near the $37.75 level. Should bullishness build into the end of this year, bulls can leg into bullish positions as they round to a full position.

Today's stronger than expected PPI data also showed some pricing pressure at the producer level. On report like this does not establish a trend, but may also hint that commodity prices are on the rise. We can perhaps see a bit of that in the above copper futures (just one commodity), but should it continue, then copper and PD may actually be a beneficiary of such a trend.

Jeff Bailey

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