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Defund the Coppers (FCX)

Posted on December 3, 2020

We’re writing today to tell you that copper is about to blow its head off.

Yes, it had a tremendous run off the Batflu bottom, but as far as we can see, that’s about to change.

We’ve come to the end of the red metal trend.

Rhymes galore we got…

Background: copper just flew above its 2018 summer highs at $3.30 to levels not seen since 2013.

She now sells for an electric $3.50 a pound, but according to our read, she’s also a wee stretched.

Yes, there are those who’ll tell you that post-Wuhan demand is about to skyrocket, and that sentiment certainly accounts for the bulk of the metal’s recent gains.

Others will point to dollar weakness as a catalyst, and they, too, have a point.

But at the end of the day, economic drivers and market prices ARE COMPLETELY SEPARATE PHENOMENA.

At least in the short-term.

And that’s why we believe we’re in for a pullback.

Take a look at the daily copper chart since March –

Technically, there’s good reason to believe we’re topping.

  • First, a 15% rise in a month – with an uncharacteristic gap up (in blue) – speaks to speculative abandon.
  • All that after a smooth eight month rally that never saw a 10% retracement,
  • Nor a retest of long term resistance/support at $2.70,
  • And now, RSI is AGAIN approaching the 80 overbought level.

But we don’t believe it’ll get there.

Without news of a fat U.S. stimulus, we don’t believe current Chinese demand will be enough to sustain the metal’s recent gains.

And that means producers like Freeport MacMoRan (NYSE:FCX) should start to buckle.

Below is a daily chart of Freeport for the last year, and it clearly shows the knock-on effect of climbing copper (and gold) prices.

But it also shows a ridiculous trajectory over the last month.

Anyone who bought the stock over the period in question would be wise to take profits now.

Have a look –

  1. FCX flashed an overbought RSI signal just last week (in green), and
  2. MACD has been rolling over ever since.  Both bearish developments.
  3. The pop higher since the beginning of November has produced numerous gaps (in blue),
  4. While price is now situated an extraordinary 100% above her long term moving averages.  That gulf will also have to close.

And if that ain’t enough, the weekly chart offers little solace for the longs.

Consider –

When both daily and weekly charts offer overbought Relative Strength readings, we say it’s time.

And we’re playing it as follows –

A Jew and his Gold recommends you consider selling the February 19th 23/26 CALL spread for $1.28 (2.82/1.54) and using the funds to purchase the FCX February 19th 25 PUT for $2.80.  Total debit on the trade is $1.52.

Rationale: with downside imminent for FCX, we want exposure, and the PUT offers us that.

The CALL spread pays for it nicely, too, and limits our loss to a maximum $4.52 (difference between CALL strikes plus our initial debit).

We’re out $1.52 to begin with, but with FCX now trading at $24.08, the long PUT is also in-the-money $0.92.  So we’re only coughing up $0.60 in time value to buy an unlimited profit potential.

Breakeven on the trade is $23.24 (exactly $0.84 below the current price).

We can foresee a decline to $19 before buyers step in.

Many happy returns,

Matt McAbby

 

6 responses to “Defund the Coppers (FCX)”

  1. M T says:

    You must be reading my mail Matt. Been eyeing the /HG for a few weeks…3.50 looks pretty close to a 1.6 extension.

    Does the Feb expiry suggest how long you think a pullback might take? Price action looks excessive but I’m finding I have to wait longer than I want to on some of these shorts, if they come in at all.

    All the best.

    MT

  2. Matt McAbby says:

    Hey, MT,
    Timing is the hardest part, no doubt. Nothing transpires according to the clock we set.
    Mostly.
    But we’ve a hunch about big news regarding the American presidency, and we’ll expound on it (one of us) in a letter shortly.
    To offer just a wee heads-up, we believe that President Trump is going to declare himself RE-ELECTED before long, and that’s going to blow the doors off the market – on the DOWNSIDE.
    It’ll come soon.
    That accounts for the timing (in large part) on the FCX trade.
    In the meantime, everything is looking way too stretched, and this should be the news that caps it.
    Gonna be a whoopee-WOO-HOO moment if there ever was one.
    Volcanic times, these.
    Stay tuned.
    And keep the faith.
    Matty

  3. M T says:

    Hi Matt,
    Thanks for this. I’m working on my timing expectations as a way to take some of the strain out of waiting.

    My current positions are all basically call options on a catalyst. Stops tight, sizing small, powder dry…waiting for confirmation to bite off anything bigger.

    All the best. MT

  4. Matt McAbby says:

    bs’d
    WOO–HEE! Brother MT hedging on the long side.
    G-d be with you.
    Remember that old tune…?
    “Running long… Running with MT…”
    Have a listen: https://www.youtube.com/watch?v=zdHg4QEmBvk
    Matty

  5. M T says:

    Hey Matty,

    Only thing I’m long are puts and bonds 🙂

    Short SAIA, MES, M2K, MNQ, /ZL, SLV, ESI, THRM, W…”running on empty” sounds good from where I’m sitting.

    Still waiting for the orange one to swoop in and pull out the bottom block!

    MT

  6. Matt McAbby says:

    bs’d
    Ain’t we all, bro…
    Feels more and more like we’re on the lip of the edge of the verge of the precipice, no?
    I say: BRING IT ON!
    Stay close, MT.
    Matt

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