A HUGE MINING TREND IS REVERSING

The recent strength in gold mining shares is reversing a huge trend that's been in place since early 2009: "base-metal miners up, gold miners not so much."

For much of the past year, the mining firms that focus on copper, zinc, and nickel have far outperformed the mining firms focused on gold. Major copper miner Freeport-McMoRan, for instance, has gained as much as 180% since the March 2009 panic. Major gold miners Barrick and Newmont have gained less than 50% in the same time period. You can see the trend in today's chart, which tracks the ratio of Freeport shares vs. Newmont shares.

The rising trendline from early 2009 to early 2010 shows how the market favored Freeport over Newmont. This outperformance came from the "reflation trade"… Investors bet the government's giant E-Z-Credit program would stoke demand for all kinds of building materials, like copper.

Now have a look at the right side of the chart. You'll see folks are souring on the reflation trade… and they're starting to favor Newmont over Freeport. If you're of the mind that the global recovery is fake… and that debt problems will continue to send gold prices higher… you'll want to bet on this new "gold up, copper down" trend continuing.

CHART OF THE WEEK: A MAJOR NEW LOW FOR COPPER

Our chart of the week displays the past six month's action in the July 2010 NYMEX copper futures. This is the most liquid futures contract trading in America right now.

We watch copper because it's a major ingredient in cars, houses, appliances, electronics, and power grids. This "in everything" attribute makes the copper price an excellent indicator of what's happening in the global economy.

Copper enjoyed a huge "stimulus" rally in 2009. Then, as you can see from the chart below, the metal suffered a correction along with most all assets in January (A). This correction took copper down to $2.88 per pound. Copper then staged a rally into the $3.60 area (B). But in the past month, copper has sold off heavily… and just yesterday, it violated that past low (C). Trend traders call this action a "downside breakout."

As we mentioned on Wednesday, the great investment question of the summer is: "Was the May selloff in stocks and commodities the start of hard times to come? Or just a correction to the intact rally?"

We don't like being the bearer of bad news, but we must note that further weakness here answers that question with, "There may be hard times to come."

COPPER IS NOW ON THE CRASH LIST

After a stunning decline of 60 cents in just a few weeks, we are placing copper on "crash alert."

Long-time readers know we monitor the price of copper for a "real time" reading of global economic health. Copper is a major ingredient in cars, power lines, electronics, and housing… so its price tends to rise and fall with economic activity.

In late April, we highlighted the "bear case" for copper. Several mining insiders are worried about a huge supply overhang… and if the brilliant Jim Chanos is right about a China slowdown, copper will crash.

As you can see from today's chart, copper has suffered an incredible drop in the past month. This decline from $3.60 per pound to $3 per pound has taken the metal close to its February low around $2.90. If this area gives way, one has to be worried about China, the global economy, and just about every asset on earth. One would also expect our bearish note on copper producer Freeport-McMoRan to be hugely profitable. Our "bonus chart" (the second chart below) shows this large miner is plunging.

AN IMPORTANT DEVELOPMENT IN COPPER PRICES

Like the 10-year note we mentioned yesterday, our friend Dr. Copper just made a dramatic "pop" higher.

Copper is a vital ingredient in cars, power lines, refrigerators, plumbing, and electronics, so its price is an excellent indicator of global economic health. The metal enjoyed a huge rally in 2009 as governments around the world "reflated" their struggling economies with cheap credit. Over a month ago, we ran a chart of copper and noted the metal's huge run higher looked to be ending. This week, however, copper staged an enormous jump to reach a new 52-week high.

Like the soaring shares of restaurants and Home Depot, the big move higher in copper shows the government's monstrous "E-Z-Credit" program is working right now. Demand for just about everything is increasing... and taking copper, restaurant profits, and home-improvement shares higher.

We'll say it again: Sure, the U.S. economy has terrible problems right now. Government debt and government debt are the two biggest. But until the charts of things like copper start to break down, we can only stand back in amazement and say, "Well done Bernanke, Geithner, and Obama, you've made spenders and speculators out of us all."

Copper jumps after Chile earthquake

Copper futures jumped to their highest in more than five weeks on Monday after a massive earthquake in top producer Chile sparked supply worries and lingering threats could push the metal to a new 2010 peak.

Saturday's 8.8-magnitude quake and the ensuing tsunamis killed more than 700 people in Chile, wrecked hundreds of thousands of homes, mangled highways and bridges and dealt a heavy blow to one of Latin America's most stable economies.

Up to a fifth of Chile's copper mine capacity was initially shut -- estimated at around 4.5 million tonnes in concentrate annually -- but the top mines slowly resumed operations on Sunday despite limited power supplies...

HOW TO JUDGE THE "HALF FULL VS. HALF EMPTY" DEBATE

The great guru debate right now: Is the economy in a real recovery, and is a decent job market on the way back? Or are high-profile bears like Harvard's Ken Rogoff right? Are new debt "shockwaves" set to rock everything?

As always, let's consult the market... and let's mind a huge potential "1-2-3 trend change."

Bulls need the uptrends in companies like Darden Restaurants and Home Depot to remain intact. These uptrends tell us the government's E-Z-Credit program is keeping the consumer and the banking industry afloat. If the uptrends suffer severe breakdowns, we'll know the negative effects of the credit bubble are still with us.

And don't forget to watch copper as a "must hold" asset for the inflationary bullish case. Copper is an essential ingredient in cars, refrigerators, power lines, and electronics. However the economy is performing – good, bad, ugly – you'll see it reflected in copper prices. As you can see from the chart below, copper suffered a major decline in late January/early February (1). It has since made an effort to climb back to its old high, which failed (2).

We now have a situation where copper is set up for a classic Vic Sperandeo 1-2-3 trend change, just like the euro experienced in December. If copper turns lower – and blows through its recent low around $2.85 per pound (3) – the E-Z-Credit stimulus boom is withering.

INCREDIBLE PRICE ACTION IN COPPER

Traders take note: Copper just "jumped out the window."

There's a classic Wall Street saying that goes, "The bull walks up the stairs and the bear jumps out the window." Bull markets tend to march higher and higher as money required to boost prices steadily flows in. When at last there are no new buyers, investors can see months and years of gains erased by a fast decline... We're seeing this phenomenon at work in the vital commodity we call Dr. Copper.

Below is a two-year chart of the red metal. Note how copper suffered a huge decline during the 2008 credit crisis. This decline bottomed at $1.30 per pound that December. Copper then staged a huge rally to $3.40 per pound over the next year. But in just the past two weeks, the bear has "jumped out the window" and erased three months of price gains. This decline has also smashed copper's year-long trendline.

Is this incredible copper decline reason "batten down the hatches" and expect the economy to head lower again? Not necessarily. But we can say copper has been punched in gut... and more losses here will at least get us prepared to "batten."