Sunday, April 19, 2009

Seeking a primary victim

to short and I think it's going to be Freeport McMoran (ticker: FCX), a base metal copper miner (which also mines a little Gold, but not enough to be considered a Gold miner). Base metal miners and commodities are screwed during a deflationary depression/bear market. The price falls and demand plummets, so it's very hard to make any money. Remember that Gold will behave as a currency during this crash, not a commodity. Silver is schizophrenic and I am concerned it will get dragged down with base commodities before it can shine agin.

Anyway, the fundamentals are terrible right now for base metal miners and please don't give me the de-coupling nonsense of China and India a la Peter Schiff. He has been proven wrong even if he ends up being right 5 years from now. The saying for market speculators is that being early is no different than being wrong. There is poor demand for copper because international trade and real estate construction have both ground to a halt and this will not turn on a dime in the next year.

The rally in copper has been impressive and is just about done, which means the rise in the FCX stock price is about done. Here is a 5 year daily chart of copper:

I am thinking this is a heavy "A-B-C" zig zag correction (i.e. down-up-down) of the entire copper bull market that began in 2001 and the B wave has just about completed. The C wave down in the copper price should make lower lows than seen in December, 2008. Next up is a 2 year daily chart of FCX thru Friday's close:

I am not a newcomer in analyzing FCX and I recommended going long FCX in late November and again twice in December here and here. I made only a small profit on the move as I committed a larger percent of my capital to gold stocks.

I used a pattern from the late 1990s to help provide a road map and everything is rhyming according to script. Here's that prior pattern again using a daily chart and below that, a weekly chart of FCX in the 1996-1998 time frame:

Astute readers may have noticed the final 1998 date on these charts is April 17th, the last day of closing price information currently available for this year! Here's a current 3.5 year weekly log scale FCX weekly chart to highlight the similarities when comparing with the prior late 1990s weekly chart:

Of course, the analysis wouldn't be complete without showing what happened next in the late 1990s after the bear market countertrend rally/bounce:

By the way, here's the chart of copper prices from the same time period in the late 1990s:

Now, those not used to going short need to realize the type of opportunity being presented here. If we are going to new lows in FCX from here, and I strongly believe we are, that means the stock will decline from the 45ish level to below the 16 level and I think it will occur in 1 year or less (I'll be out by this fall). With long-term put options bought next week, this could be a 400-600% gain in less than a year using deeply out of the money puts!

I'm going to be scaling into FCX 2010 LEAP option puts this week after a good up day or two, which should correspond with a low in the $VIX (making puts even cheaper). This one's going to be big and profitable for those with an intermediate-term horizon.

Wikinvest Wire