Freeport McMoRan Inc: Time to Go Contrarian With FCX Stock

As they say, “what goes up, must come down.” But for natural resources play Freeport McMoRan (FCX) a full-fledged, rough-and-technical tumble confirmation of that expression could offer solid support for FCX to find a bottom and rally strongly in 2016.

fcx Freeport-McMoRan Copper & Gold FCX logo

If you could bottle gravity and sell it, Freeport McMoRan would be involved. As it stands, gravity on the price chart has put an extreme hurt to FCX stock’s investors the last few years.

In 2015 alone, FCX has lost roughly 69%, and it’s little wonder Freeport has struggled so much.

While FCX is best known and most dependent on cooper, it’s also a diversified commodities player, and that strategy simply has not worked … especially as it took on increased debt in order to expand its reach in the commodity space.

And now FCX stock is down big because hard commodity and energy assets have gotten pulverized the last few years on everything from fears of oversupply, gluts, overbuild concerns and weak demand.

Freeport is also the victim of panicked investors and overzealous bears who have the media backing their cause with dire headlines and predictions.

Call me cynical, but I’m buying what they’re selling. What I mean is I’m a buyer of the FCX chart at these prices because as far as I’m concerned, the end really is near.

FCX Stock Weekly Chart

Source: Charts by TradingView

Since January 2011’s high of $59.83, FCX has lost 88%. And now that FCX has retested its December 2008 financial crisis lows, I think the end really is very near.

But unlike the authors behind the dire bearish forecasts, I see the opportunity for a massive double-bottom forming in shares of FCX.

Friday’s lows of $7.54 undercut the 2008 low of $7.85 to establish the technical pattern low. Price action has also run into the lower Bollinger band, which should act as support for FCX.

Further, with the Bollinger band in FCX turning modestly upwards, support for the pattern becomes a bit more compelling in our view.

Given the absolute size of the four-year pattern, if FCX were to crack last week’s $7.54 and move down as low as the $6.50 to $7.00 area before reversing higher, I’d still view the pattern as intact and a bullish proposition for FCX bulls.

FCX Long Call Strategy

A check of the FCX’s volatility levels shows that premiums to buy a long call are fairly priced relative to underlying volatility in FCX.

Both volatility measures have dipped well below the highs of this past fall, which benefits the long call. Further, given FCX stock’s lower dollar price tag and media attention, there’s not too much concern that premiums will slip aggressively and to the detriment of a long call position.

Reviewing the FCX stock options board, I like the May $10 call for up to 70 cents. Granted, wish shares trading slightly above $7.20, the out-of-the-money call maintains a somewhat lofty breakeven of $10.70 at expiration. That’s the seemingly bad news for this FCX call.

The real upside of this FCX call is time decay isn’t a problem over the next couple months. Further, prior to May expiration, there’s plenty of time on the calendar that allows for extrinsic or “time value” profits to accrue.

Lastly, if the trader decides to manage the FCX call with some type of stop loss, he or she can likely exit for a much slighter loss while maintain the maximum risk to the price paid for the contract.

Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT

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