Freeport-McMoRan Inc (NYSE:FCX) jumped higher by nearly 6% on Wednesday, and credit for that lies in large part to rising copper prices. While the broad market recovery was taking a breather, rotation struck beneath the surface. Capital fled some areas only to find a new home elsewhere, and the biggest beneficiary from a sector perspective was basic materials — copper in specific. Thus, on a go-nowhere, do-nothing day, the sharp ascent in FCX stock warrants further investigation.
The S&P 500 ended the day with a neutral candlestick — the doji. Perhaps the pause was justified given the markets already robust recovery from last week’s plunge. While the stalemate would normally be a cause for concern, I find it difficult to become overly pessimistic given the strong sector rotation.
Rather than a mass exodus of cash, we’re seeing mere shuffling from one space to the next.
Doctor Copper is In
For an update on copper prices, look no further than the iPath Bloomberg Copper Subindex Total Return Sub-Index ETN (NYSEARCA:JJC). Its name is a mouthful to be sure, but you can just think of it as the copper ETF.
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Yesterday’s 3.43% rally reflects the price of copper rising to a new two-year high. Given how many years copper prices have been sinking, the recent turnabout is a big deal.
With rising moving averages across the board, there’s nothing not to like about the commodity right now.
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Traders of FCX stock always keep an eye on copper prices since both are tied at the hip. For a taste of just how strong the relationship is, check out the following chart overlay, complete with a correlation study.
The current 20-day correlation stands at 0.79, showing both assets have been mirroring each other’s movements.
FCX Stock Charts
The timing of yesterday’s jump was fortuitous. The pullback in Freeport-McMoran shares was on the verge of becoming unnecessarily messy.
By that I mean it had already broken the 20-day moving average and was turning into too deep of a pullback. Diligent readers may remember we pointed out its retracement two weeks ago, concluding it was a solid buying opportunity (see here). With Wednesday’s rally that particular forecast has officially been validated and the trade suggested then is now doing swimmingly.
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An honest analysis of the charts demands a positive outlook here. The slight dip below the rising 20-day moving average has now been reversed returning FCX into bullish territory. A return to its prior high of $15.29 seems all but inevitable at this point.
Further buttressing the bulls is the behavior of the Relative Strength Index (RSI) indicator during the recent downturn. Though it retreated a considerable distance, the RSI remained above the all-important 50 level that is often viewed as the demarcation line between the bull and bear zone. Dips in the strongest stocks never take the momentum indicator below 50 before buyers swoop in.
Trade FCX Stock on the Cheap
In my last Freeport-McMoran piece I suggested a Sep naked put play. This time let’s switch it up with a long call play. We’ll go out to October to provide ample time for the stock to rise. That way if it decides to consolidate for a few weeks, time decay won’t eat our lunch.
Buy the FCX Oct $14 calls for $1.35 or better. The max loss is limited to the initial cost. To reduce the risk, however, I suggest exiting if the stock falls below support at $13.82. As with all long call plays, the max gain is unlimited to root for a big-league move higher.
As of this writing, Tyler Craig held bullish positions in FCX. Want to learn how to master the art of option selling for high-probability cash flow? Check out Tyler’s recently released video series through Tackle Trading on how to systematically sell iron condors for monthly income.
