Off the chart, there’s plenty of reasons, old, new and ongoing, for investors to be wary of Freeport-McMoRan Inc (NYSE:FCX). Yet, looking at the technical picture in FCX stock, there’s even more provisions which show this is an opportune time to mine for bullish profits using a modified fence strategy. Let me explain.
The bear narrative is in full swing in copper miner Freeport-McMoRan. Investor fear — or maybe outright panic — springs from enduring Indonesian trade agreement concerns to an escalating trade war with China and now a mixed, but poorly received earnings report for FCX stock.
On Tuesday, shares of FCX were drilled lower by 14.5% to a five-month low following the company’s Q1 corporate confessional. Investors appeared to take their cue from the miner’s 10 cent profit miss on earnings of 46 cents while looking past a full 200% increase in Freeport’s bottom-line compared to the year-ago period.
Additionally, an update missing any real clarity on Freeport’s continued long-in-the-tooth negotiations with the Indonesian government over its Grasberg mining operations likely proved an irritant with FCX stock investors.
Lastly, given Tuesday’s bearish market sentiment, it’s easy to appreciate how solid year-over-year revenue growth of 46% was swept to the side in favor of a modest sales miss of just 1.2%.
The good news is that the bad news is looking fully reflected in the price chart of FCX stock — and one backed by a sturdy support zone.
FCX Stock Weekly Chart
Investors’ fear off the price chart has incentivized investors into selling FCX stock for the bulk of 2018 — an action punctuated by Tuesday’s dramatic sell-off. The flip side of this bearish behavior is that the net corrective activity has pushed its way into a staunch support zone within Freeport’s existing uptrend.
The current counter-trend price channel is now testing a multi-layered area from around $13.85-$16.25. The top of the price range and being challenged presently, is backed by the 200-day simple moving average and what I’ve labeled as a “true” uptrend support line dating back to the 2016 low.
The bottom of this key support zone holds both the 38% retracement level and a neat-and-tidy “best fit channel.” In between the upper and lower supports, the prior downtrend line from 2011 and the oodles of price congestion, the lateral resistance from the past year or so should now act as support for a low within the uptrend to emerge.
FCX Bullish Modified Fence Strategy
For like-minded or agreeable investors that are keen to get long FCX stock with vastly reduced and limited risk and at strategically-placed levels which align nicely with the unfolding technical picture; a bullish modified fence strategy looks attractive.
Reviewing Freeport’s options, one favored combination is to buy the Aug $21 call and sell the Aug $14/$13 put spread. With shares at $16.08 the spread is priced for even money or no cost.
The primary objective is for the out-of-the-money call, which is slightly above the early January and up-channel high, to move firmly in-the-money over the next few months. The below-market put vertical spread finances the long call.
Risk is contained to $1 on the downside and is stationed so the fence doesn’t begin to even lose money, on an expiration basis, until and if the bottom of our discussed support zone is definitively broken. And as this fence also minimizes risk relative to owning FCX stock, the position can work well for investors who are looking to accumulate shares at a steep discount to today’s prices.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities 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 and StockTwits.