Following on from my post last week “What goes up must come down” , where I looked at the two largest producers of , Chile‘s Codelco & also the American firm Freeport McMoRan, I have spent some time over the weekend researching the copper market & looking to see if I could find anymore signals that would show market direction.
Re-capping on the trade, FCX so some very significant selling volumes from the open on Friday & the trade triggered as FCX fell through the 65 mark, where I commited to 50% of my planned exposure, the remaning 50% was then entered at 64.25 & I rode this down to 63.06. I am looking to repeat this trade as a swing this week & here are some of the reasons why.
As previously stated on Freeport McMoRan, the company has scaled back copper production & has increased gold production to an all time high. Freeport is making some serious cutbacks & cost management is a major theme, as with many other major stocks, so I am still bearish on FCX as a whole from a fundamental standpoint.
Whats more interesting, is looking at some other factors that help bear out (nice pun) my thesis that we are looking at short term oversupply of copper. First let’s have a look at the copper Exchange Traded Fund : JJC, it has seen a strong uptrend since early this year, returning a tad over 100% year to date, however looking at this technical chart, it would seem to be overbought & is signalling this.
Turning to a shorter term chart & looking at volumes on JJC, we can see that it hit & refused it’s upper Bollinger on Thursday 13th & saw some very aggressive selling in high volumes on Friday. If we then look closer at the history of the ticker, it has a habit of withdrawing back to it’s 20 Day Moving Average, which would give a reasonable bottom at 36.90 on any significant breakdown. So, I am looking to take another short position in JJC (if I can, it’s pretty illiquid) & see if I can’t double up on my FCX trade.
Another indicator that all may not be well is the performance of the Base Metals ETF : DBB, which holds an equal 33.33% in copper, aluminium & zinc. DBB has also had quite a years so far, with a return rate of 53%, on Friday this started to look fragile & there was fairly spikey activity in the ticker all through the day, finally closing 3.8% down, so not a bright day for metals at all. Again looking at a 3 month chart, we can see that DBB has been hitting it’s head against the upper Bollinger since mid July & at the latter end of last week also refused. Needless to say that Friday saw some volumes selling off, although not as heavily as FCX & JJC. The reasoning behind this is that DBB is held by select financial institutions & they are unable to un-reel their positions very quickly.
So to summarise, FCX still looks weak, JJC in my opinion is looking to implode & the major ETF in this sector is on the retreat. Again, I’ll be looking at shorting Freeport down, as per the tactics from my last post & if I can get in on JJC, I’ll be tapping into a short there too, looking for an exit at around 38.50. If the sell off continues, next stop for me is the 34.20 mark, so I’ll look to drop the short at 34.50. Add to all this the negative sentiment on China & commodities right now, I think these swings could be real earners for this week.
Author has no current holdings in any stock mentioned