Season’s Fleecings! (FCX, USO)

Worthwhile looking at one of the world’s biggest mining companies to get a picture of just what’s going on in the precious and base metals these days – nay, in the commodities as a whole!

Below is a daily chart of Freeport McMoRan (NYSE:FCX) for the last six months. For those who don’t know the company, Freeport’s among the world’s largest copper miners, with a current market cap of just over $22 billion – down nearly 50% from the $40 billion handle she had just five months ago.

Freeport also mines gold and molybdenum and has a hand in one of the world’s biggest cobalt operations in the Democratic Republic of Congo.

But that’s not all. FCX also has shale assets in the U.S. and oil and natural gas operations in the Gulf of Mexico. In short, Freeport is the commodity world in microcosm.

And how does she look today?

Take a peek –

fcx1218

We didn’t check, but the last six months may be the worst on record for Freeport. The stock fell from peak to trough just a hair less than 50%, all her moving averages are trending lower – though are not fully unwound – and the selling looks to be gaining momentum (see volume, in black).

This, by the way, is purely a reaction to commodity prices, as far as we can tell, and has almost nothing to do with management or corporate direction or anything else material in the operational or financial running of the company.

But despite the ill appearances, stockholders should take heart – even if only temporarily.

We see a potential turn higher for the company’s shares as result of the deeply oversold RSI reading that was registered earlier this week (blue circle). The sub-20 print will be on the radar of all competent technical analysts, and no doubt the brokerages will be ready to play an interim move higher here, too.

BUT WAIT! THERE’S MORE!

truth

It turns out that after a four-year, grinding bull market, Freeport’s weekly chart is also signaling a forthcoming bounce.

What that means for the commodities in general is anybody’s guess. Four-years is a long time, yes. But markets can trend lower for years, just as they can higher.

All that notwithstanding, here’s the weekly FCX chart for your ogling pleasure –

fcx12182

Clearly we have bad news for the long-term investor in FCX stock. The break below the blue line – the stock’s bear market lows, registered in June of 2013 – sends a dire message to investors: the decline is not complete.

The best proof may come from the tremendous technical selling that occurred over the last two weeks (blue box) that brought FCX lower by a wild 20%.

All the same, for we traders this bout of weakness is precisely what the doctor ordered. For out of every crisis arises great opportunity, and the chart’s spike below RSI 20 (in black) sends an equally powerful message – that we’re due for a short-term bounce.

It may not last long at all, and it may not materialize forthwith, but we have to believe we’re on to something when we propose a speculative long position on FCX over the next two months.

bugme

All right then, how do we play it?

 

Before we actually suggest a trade, consider first that much of what happens in the commodities (and equities and fixed income markets, for that matter) will be decided in the oil pits. Because it’s the price of crude today that’s destabilizing normal course market functions around the globe.

As soon as it becomes clear that oil’s decline has at least approached a bottom, the rest of Wall Street’s worrywarts will be able get on with the business of buying.

And where’s oil stand today?

After one of the most dizzying drops we remember in any market, crude oil is now also deeply oversold on a daily and weekly basis.

Have a look here –

uso1218

Seen this one before?

In a chart that looks stunningly similar to that of Freeport McMoRan (above) – even down to the dollar figures on the stock – the United States Oil Fund ETF (NYSE:USO) also looks ready to bounce.

You can play the one or the other – or both. But give yourselves enough time. And if you see a pop higher, take your money. This thing could very easily get ugly again. And quick.

Back next week with our Christmas blockbuster issue.

Stay tuned, and until then,

Many happy returns!

Matt McAbby, Senior Analyst, Normandy Research

See what people are saying...

  1. Gary Loest

    A bounce is imminent….. but if trading it, then give yourself the gift of time when trading options.

  2. John Szoke

    Yes, McAbby you olde vet you, I agree. I believe USO will have a short term bounce in here, retest the lows and then form a long basing pattern for 6-9 months. I’m playing it with Jan. calls in APA and CGO. I’m also looking to add a stock purchase of FCX for the long term. We shall see. Happy holidays!

  3. Stephen

    Dear Hugh,
    Funny thing about this belief that there’s too much oil around, for it to be expensive. The world (only) runs almost completely on it, and it can’t, without it???
    There can never be enough around, to not need. In view of your FCX, and USO charts.
    So, because it’s so cheap, it’ll be burned away, ever more fiercely.

  4. Matt McAbby

    Hey Johnny,
    Thanks for writing.
    Consider selling CALLs against that FCX purchase to reduce your costs!
    Cheers!
    Matt

  5. Chipster

    Matt – Re: “We didn’t check, but the last six months may be the worst on record for Freeport. The stock fell from peak to trough just a hair less than 50%….”
    Why not check? The last 6 months of the 2008 bear were far worse for FCX. It fell from $63.32 on June 20 to $7.85 on December 5. Of course this time is different in various ways including a bear market hasn’t started yet.

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