Freeport-McMoRan Inc. (NYSE: FCX) is facing consistent selling pressure after the talks failed with the Indonesian government regarding its long-term operating rights under its Contract of Work and its right to export concentrate without restriction. While acknowledging the volatility, it is important to remember that the management is doing a good job at steering the ship in the right direction and a resolution to this issue will be found sooner or later. The selling has been painful to watch but there are some levels that an investor can consider to create fresh long positions or increase their exposure. With the help of technical price charts, an investor can make an informed entry in FCX.
The daily FCX price chart below shows that the stock has hit oversold levels on the Money Flow Index and is about to do the same on the Relative Strength Index as well. The 14-day MFI reading is at 14.2795 while the 14-day RSI reading is 32.6804. For investors who are not familiar with technical analysis, it is helpful to note that a reading of 20 or below in MFI represents oversold conditions. Similarly, a reading of 30 or lower represents the oversold territory in RSI.
Now, oversold conditions don't guarantee an immediate rebound. But, frequently, they do discourage short sellers from piling on bearish bets and sometimes, even lead to short-covering. It is best to utilize this information when the underlying is near its support level(s) since it enhances the probability of a rebound. Thankfully, for FCX, the 200-day simple moving average of $12.5177 is the next support. From the last closing of $13.73, it represents a correction of 8.83 percent.
To put it simply, if the stock declines another 8.8 percent, it would make the stock technically compelling to force the short sellers to exit their positions.
Another thing to consider here is that the stock has embarked on an upward journey by forming an Inverse Head And Shoulders. According to Investopedia,
An inverse head and shoulders, often referred to as a head and shoulders bottom, is a chart pattern, used in technical analysis to predict the reversal of a current downtrend. This pattern is identified when the price action of a security meets the following characteristics: the price falls to a trough and then rises; the price falls below the former trough and then rises again; finally, the price falls again but not as far as the second trough. Once the final trough is made, the price heads upward, toward the resistance found near the top of the previous troughs.
A suitable profit target can be ascertained by measuring the distance between the bottom of the head and the neckline of the pattern and using that same distance to project how far price may move in the direction of the breakout.
In the weekly FCX price chart below, I have clearly marked the Inverse Head And Shoulders pattern. In my opinion, even though the stock is attempting to close below the neckline resistance (horizontal green trendline), I do not believe that it would disrespect the upward sloping support. This support is now at $12.
Going by Investopedia's definition, the price target for this pattern comes out to be $24 in the case of FCX. The neckline resistance is at $14 while the bottom was hit near $4. Adding the difference of $10 to the breakout level of $14 gives us a price target of $24.
Although the time-frame for this price target is purely dependent on the action in copper prices, it is safe to assume that investors should keep a long-term perspective in mind, given the heightened volatility and the rich valuations in the broader market.
Since I have mentioned copper, it is worthwhile to discuss the action in copper (NYSEARCA: JJC) market as well. As is evident from the daily copper futures price chart submitted, the metal had given a powerful breakout from a contracting range on February 10 but failed to build on the positive momentum. At the time of writing this article, copper futures were trading at $2.7070 and testing the support once again. The point to note here is that the support has kept alive the rally in copper since October and therefore, it is important that bulls protect this safe zone. If this cushion is pierced, copper can easily come sliding down to near $2.500 levels. That will only make things difficult for Freeport.
Freeport-McMoRan will soon provide investors with another opportunity to lap up the shares at attractive levels. At $13.73, the stock has become oversold but there is still some downside left. The key supports for FCX are in the zone of $12.00-$12.50. This indicates that a further 8-12 percent cut cannot be ruled out in the stock.
If the stock indeed drops to the discussed support levels, it would easily price in the negatives arising out of the stalemate with the Indonesian government. Given that copper has also failed to sustain the powerful breakout witnessed earlier this month and is threatening to pierce the support, it is safe to wait for lower levels in Freeport now.
The bigger picture is still bullish as the stock is technically poised to rise after an interim fall. The Inverse Head and Shoulders suggests a target price of $24 if the pattern matures successfully. That would represent a nearly 100 percent upside if an investor gets to buy the stock in the lucrative zone of $12.00-$12.50.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.