Despite copper’s valiant attempts to keep up with the recent resurrections in gold and silver, it’s beginning to falter. While Dr. Copper is up over 10% amid the budding commodity rebound, overhead resistance is proving too powerful for the industrial metal — and that in turn is setting up a potential play in Freeport-McMoRan Copper & Gold (FCX)
Late last year, $3.40 acted as major support, kicking off a three-month run in copper before a new downtrend took root. With old support becoming new resistance, the $3.40 level now sits heavy atop copper, stymieing each advance. What’s more, the declining 200-day moving average looms closely, adding further selling pressure in this area.
To determine how copper has been faring compared to the broader commodity complex, we can look at a ratio of copper vs. the Powershares DB Commodity Index (DBC). The continual contest has had an obvious winner this year as the ratio has been falling month after month, showing copper’s persistent underperformance.
Adding insult to injury, its latest attempt to start outperforming — by breaking the trendline in the ratio — failed.
Weakness in emerging markets — particularly the BRIC (Brazil, Russia, India, China) countries — is weighing on copper. Recently, the iShares BRIC Index Fund (BKF) broke support and began yet another short-term downtrend. Given the positive relationship between BKF and copper — their correlation is +0.53 — a new down-leg in BKF will likely drag copper with it.
Rather than play copper directly via its ETF — the iPath Dow Jones UBS Copper ETN (JJC) — you could use a stock whose fate is often tied to the copper market, Freeport-McMoRan Copper & Gold. Most traders shy away from JJC anyways as it lacks adequate liquidity, particularly in the options market.
Like copper, the recent upturn in FCX is encountering longer-term resistance in the form of its declining 200-day moving average. With its latest rally having failed to make a higher pivot high, FCX has developed a potential double-top pattern. The small support zone around $30.25 — which so far is holding — is the only thing standing in the way of the completion of the double-top formation and a renewed downturn in the stock.
If you’re looking for FCX to follow copper into the depths, consider buying put spreads if it breaks the $30.25 support zone. You could enter the Oct 31-28 bear put spread by simultaneously buying the Oct 31 put and selling the Oct 28 put. The max risk is limited to the initial debit paid and the max reward is limited to the distance between strikes minus the net debit.
The spread currently is trading for $1.15 (making the max risk $1.15, and max reward $1.85), but if you wait for FCX to trigger by breaking support, the put spread will be a touch more expensive.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.