Defund the Coppers (FCX)

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 19^th 23/26 CALL spread for $1.28 (2.82/1.54) and using the funds to purchase the FCX February 19^th 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

Follow @HughLOHaynew