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Southern Copper outstrips record copper rally; may fall back to earth

|Includes: Southern Copper Corporation (SCCO)

Tim Biggam, TradingBlock  (October 28, 2011, 3:08pm CDT)

Symbol Analyst Target Price Target Date
SCCO 30.00 December 16, 2011

Southern Copper (ticker: SCCO) is Peru’s largest copper producer with mining operations in Peru and Mexico. The Company owns and operates open pit mines and metallurgical complexes that produce copper, molybdenum, zinc, and precious metals.

Copper prices have just put in their best 5-day performance ever, rallying nearly 20%, far outpacing even the dramatic move in equity prices. Copper stocks have followed suit with SCCO rallying nearly 16% in that timeframe. Sentiment indicators such as 9-day Relative Strength Index and Detrended Price Oscillator are flashing extremely overbought levels. Valuations are also getting a little stretched, with SCCO now at a premium to the S&P 500.

SCCO is also approaching some fairly heavy resistance in the 34 range, along with the 200-day moving average of 34.48. SCCO blew past the 50-day moving average of 29.23 with a little too much vigor to hold at these levels, and is finally showing some weakness today. Additionally, SCCO has risen sharply through the Bollinger Bands, which have proven to be reliable indicators of intermediate overbought conditions in the past.

Given my somewhat bearish market viewpoint, combined with the big outperformance of copper to the overall market, I look for SCCO to move back to the 50-day moving average level round 30 by December expiration.

Play of the Day

 Based on the Southern Copper's (ticker: SCCO) current market price of $32.46 and using a target price of $30.00, a target date of December 16, 2011 and $1,000 of investment capital, below are three options strategies (ranked by potential profit) and a comparative stock trade to consider should the price target be achieved at the target date.

Click on the strategy name below to access trade details using TradeBuilder on Powered by TradingBlock's TradeBuilder.

Strategy (click for details) % Return at Target Probability of breaking
even or better
Buy Dec Put Spread +107% 37%
Sell Dec Call Spread +59% 52%
Buy Dec Put +44% 37%
Sell Stock +8% 46%

* Click link to access TradeBuilder details on Must have Instant or Actual account. Subject to change due to changing market conditions.  Click here to view risks regarding selling stock short.

DISCLAIMER: This content is provided for educational and informational purposes only. Evaluate any strategy prior to use to understand risk and suitability. TradingBlock does not endorse or warrant any Market Analyst content, service or product. Use this content at your own risk without guarantee or warranty of any kind from TradingBlock. Tim Biggam is a TradingBlock registered representative. He is not compensated by TradingBlock for any market research or analysis services.