After a stunning 225% move from the Jan. 20 intraday low of $3.52 to last Friday’s high of $11.45, shares of Freeport-McMoRan Inc (FCX) are running into major technical resistance and appear to be finally weakening, setting up for a retracement of the recent massive gains. .
Click to Enlarge FCX failed to clear the looming overhead resistance at $11.40 last week, with FCX stock briefly poking past that level before ultimately reversing and closing lower on the day.
This sort of reversal pattern, with the stock attempting to break out to a new high only to succumb to selling and close lower on the day, is many times the sign of a short-term top. This signal is even more powerful following a strong rally, which certainly has been the case in Freeport-McMoRan.
FCX is getting very overbought on a 14-day RSI basis, with a reading exceeding 70. In the past two years, both instances when FCX was this overbought marked significant tops in FCX stock, as seen in the chart.
While FCX did clear the 200-day moving average at $10.45, the breakout has been certainly less than robust. A failure to hold this critical level would be a bearish technical signal as well.
As one of the world’s largest producers of copper and copper-related products, FCX stock is highly correlated to the price of copper. Copper is also showing similar signs of fatigue after a monster rally. With copper demand being driven mainly by stronger economic growth, especially from China, the recent tempering of growth forecasts by both the IMF and Federal Reserve does not bode well for further copper price appreciation.
FCX Stock Trade
Implied volatility (IV) is now trading near the lowest level of the year in Freeport-McMoran, also a contrary bearish indicator. It also makes long option strategies more attractive, so I am looking to position for a pullback in FCX with a put diagonal spread.
While I think FCX is ripe for a pullback, I am not looking for a crash-type scenario, so a defined risk spread position with a lower initial cost is more prudent.
Specifically, I am buying the FCX May $10 puts and selling the FCX April $9 puts for a 62-cent net debit. The spread sets up net short 13 deltas, which is equivalent to 13 shares short of FCX stock per spread.
The maximum risk on the $62 per spread, with the position showing maximum profit if FCX moves towards the $9 strike price by April expiration.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
