A 25% Drop in Freeport-McMoRan Inc (FCX) Stock Has Declawed the Bear

Advertisement

Copper prices closed at an eight-week low yesterday, down 6% from the recent highs. Shares of Freeport-McMoRan Inc (NYSE:FCX), the world’s largest publicly traded copper producer, have fared even worse. Freeport has dropped over 25% from late January highs, putting the stock firmly in bear market territory.

A 25% Drop In Freeport-McMoRan Inc (FCX) Stock Has Declawed The Bear

FCX stock, though, is starting to reach oversold levels that even previous bears like myself may start to find intriguing.

In my prior report on Freeport-McMoRan from Jan. 26, I laid out the bearish argument on FCX stock. This proved to be the case, with Freeport dropping sharply in that time frame.

Remarkably, all of those arguments that supported a bearish viewpoint with the stock at $17 now validate a somewhat bullish viewpoint with FCX trading at $12.21. Price matters, markets change and analysis needs to adapt.

In my earlier report, I pointed to Freeport-McMoRan being extremely overbought, with nine-day RSI over 70. The 25% subsequent drop in FCX stock certainly cured that, with Freeport now being deeply oversold at the 30 level. Previous instances when nine-day RSI reached a 30 oversold reading were opportune times to take a bullish stance on the stock.

As a major copper producer, FCX stock is highly correlated to the price of copper. Divergences from the normal correlation can provide trade opportunities, such as the short opportunity noted when it was trading at a large premium to copper in late January.

With Freeport McMoRan now trading at a big discount to copper, that situation has been reversed, with FCX now a viable long candidate.

Short term, my bullishness is rather subdued, with an expectation of a move to test the $13.25 resistance (formerly support) level over the coming week. The 200-day moving average will be the first hurdle.

Interesting to note that even with the recent sharp selloff in FCX, options prices are still extremely cheap. Implied volatility (IV) is only in the 5% percentile. So to position for a counter trend bounce, long option strategies are favored. Given my only a slightly bullish viewpoint, this sets up ideally for a call calendar spread.

FCX Stock Trade Idea

Buy FCX April $13 calls and sell FCX March $13 calls for a 40-cent net debit.

Ideally, Freeport rallies slightly and consolidates around the $13.25 area by March expiration for maximum potential gain.

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.

Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, four years as Lead Options Strategist at ThinkorSwim and three years as a Market Maker for First Options in Chicago. Tim makes weekly appearances on Bloomberg TV  “Options Insight”, Business First AM “Trader Talk”, TD Ameritade Network “Morning Trade Live” and CBOE-TV “Vol 411” to discuss everything from volatility and option related.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/freeport-mcmoran-inc-fcx-stock-bull/.

©2024 InvestorPlace Media, LLC