Contributor Since 2010
Copper futures and stocks have been falling fast, but with the charts showing no positive signals, now is not the time to go bargain hunting. Here’s how to know when the time is right.
Much has been made recently over the sharp decline in copper prices as the futures price topped at 464 in December and has now dropped back towards the 400 level. Some analysts have interpreted this as a sign of a failing economic recovery, and the weaker-than-expected housing starts data has also increased the bearish sentiment. However, despite the 15% drop, the longer-term charts suggest that the major uptrend for copper prices—and the economic recovery—is still intact.
The action in the copper futures is consistent with my outlook for Freeport-McMoran Copper & Gold (FCX). On January 25, FCX closed at $53.22 and I was looking for a decline to the $45 to $49 area (adjusted for two-for-one split). With FCX hitting a low of $46.20 last week, is it time for action, and what about other copper stocks?
Chart Analysis: The recent decline in copper prices does not look that severe on the weekly copper futures chart, as it shows a well-defined trading channel (lines a and b) with the upper boundaries tested in late 2010.
*Read Buy, Sell, or Wait: A Way to Decide for more on trading with starc bands
Freeport-McMoran Copper & Gold (FCX) has declined about 24% from the January 15 highs at $61.34. Those who have invested in FCX over the years are likely not surprised by the severity of the decline, but I am sure many have sold their long positions in the past month.
Southern Copper Corporation (SCCO) is more of a pure copper play as it mines and refines copper in Peru, Chile, and Mexico. It peaked on January 3 at $50.35 and closed on Wednesday (Mar. 16) 20.7% below these highs. The long-term uptrend on the weekly chart (line a) is still clearly intact
What It Means: The decline in copper prices and the key copper stocks has reversed the overly bullish outlook from late last year. Clearly, many weak long positions in the copper stocks have likely been stopped out. With no positive signals from the daily studies, it is too early to confirm that FCX or SCCO have bottomed.
Typically, if copper futures prices bottom around 400, I would look for a rebound back to the 435 area before prices set back once more. I would not be surprised to see a formation of a triangle on the weekly chart. I am not expecting a protracted consolidation period like the one that developed in 2009-2010. Nevertheless, a drop to the key converging support levels would be a good risk/reward opportunity for new long positions in FCX and SCCO.
How to Profit: Technically, once FCX and SCCO complete their bottom formations on the daily charts, I would then expect a sharp rally back towards the early-February highs. Such a rally should set the stage for another pullback. Though I do not generally favor bottom fishing, the volatile nature of the copper stocks does favor buying at converging support levels.
For FCX, buy at $44.90-$45.58 with a stop at $42.92 (risk of approx. 5.8%). On a move back above $55.55, raise the stop to breakeven.
As for SCCO, buy at $35.17-$35.88 with a stop at $33.88 (risk of approx. 5.5%). On a move back above $45.40, raise the stop to breakeven.