After a monster rally of nearly 30% since the beginning of the year, shares of Freeport-McMoRan Inc (NYSE: FCX ) are looking like they reached a short-term top. A disappointing earnings report yesterday certainly tempered the recent exuberance.
Given the loss of price momentum and fundamental weakness, I expect FCX stock to struggle to head appreciably higher in the coming weeks.
Freeport reported earnings of 25 cents per share, well below consensus estimates of 34 cents. More importantly, revenues came in at only $4.38 billion versus expectations of $4.42 billion. There is also the ongoing production issue in Indonesia, with onerous government regulations hampering operations. Freeport-McMoRan has recently shed assets to reduce the debt load, which will temper any future revenue growth.
FCX stock is overbought on a technical basis, with nine-day RSI over the 70 level. Prior instances when it reached similar overbought readings proved to be significant short-term tops. I expect a similar pattern to ensue and for Freeport-McMoRan to begin to consolidate.
As the world's largest publicly traded copper producer, FCX stock is highly correlated to the price of copper. The chart shows just how tight this correlation has been.
Copper prices are at multiyear highs and looking toppy at the $2.73 level following an epic Trump Train rally.
So with copper looking to have difficulties heading higher in the short term, I expect FCX to encounter similar difficulties as well.
A key level to watch on Freeport-McMoRan is $16.35. This was the breakout point for the last leg of the rally FCX stock. The stock did hold this level post-earnings, but I expect it to likely consolidate at this point over the next few weeks.
So to be a bull on FCX stock at current levels, one must dismiss earnings and revenues and believe that copper prices will continue the seemingly unabated rise ad infinitum. I, for one, tend to be a little more skeptical. So to position for the Freeport-McMoRan rally to stall out, a short term bear call spread makes sense.
FCX Stock Trade Idea
Buy FCX Feb $19 calls and sell FCX Feb $17 calls for a 30-cent net credit.
Maximum gain is $30 per spread with maximum risk of $170 per spread. Return on risk is 18%. The short $17 strike is positioned near the recent intraday high of $17.06. I would use a meaningful move past this level as a stop while looking to let the spread expire worthless and keep the initial credit if FCX stock remains well-behaved.
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 firstname.lastname@example.org.
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