Metals. Now. (FCX,UUP,UNG)

Executive Lounge, Options Trader Elite / Thursday, July 27th, 2017

Metals. Now. (FCX,UUP,UNG)


We’re going to take a broad survey of the commodities today because recent action in the ‘stuff’ class is looking bullish, and we believe we’ve identified a clever way to trade it.


But first to the background.


We start with the dollar.


As of this writing, the buck sits at its weakest level in a year and is threatening to plunge Alice-like into the nether realms if it loses but a rabbit’s hair more value.


In percentage terms, a mere 2% decline from current levels would put the dollar necrophiliacs into a rapturous frenzy of selling.


And to where she drops, nobody knows.


Have a look –

This is the U.S. Dollar Index for the last three years, and as you can see, support sits but a whisker below current levels.


It goes without saying that a tumble of the sort we alluded to above would send the price of commodities blasting through space in search of an equilibrium moment.  The g-spot earthquake of buying that would ensue would simply be too much for the market to keep clothed.   The panties would fly and the ensuing screams would wake the neighbors from here to Peoria, a place, incidentally, where there are very few g-spots and almost no one wears panties.



Anyway, technically, we have what appears to be a moving average rollover in progress (in blue), and whether it continues is anyone’s guess, though the momentum is clearly on the downside.  And neither the daily chart nor the weekly (not shown here) offer a clear sign of where the next support level might materialize.


Does the Dollar Have a Future?


A look at the trend in dollar futures contracts shows an equally fearsome picture.  Not since late 2013 have we seen so little speculative interest in the buck.


Look here –

Perhaps equally troubling for dollar bulls is the rate at which the most recent liquidation of dollar longs occurred.  At the right end of the chart (adjacent to the arrow) the unwind shows itself in all its glorious steepness.


Note, too, that prior to the dollar’s wild rise HIGHER in the winter of 2014/15, net spec numbers for the buck shot just as steeply higher.




The Price of Goji Berries in China


The world’s commodities are, for the most part, priced in American bucks, and that means any tumble in our local currency vis-à-vis the rest would force the entire commodity asset class higher, a development that would be meaningful across the board, but most formidably, we believe, in the energy sub-sector.


Oil and gas have been riding the sewage train for the better part of three years – not coincidentally the same time that the dollar began to scratch itself free from its own cold crypt.


And now?


We have hope for oil and gas, and we’ll return to discuss them momentarily.  But first, let’s have a quick look at the metals.


Our sojourn in the land of metaldom is not going to cover the precious metals today, though there’s much to commend the ongoing bullishness we see there, particularly in gold.


Rather, we’re going to focus on the latest action in copper, the metal that Wall Street claims has a Ph.D in economics.  And indeed, there’s something to be said for moves in the copper pits being a leading indicator of economic growth.


Let’s see how Dr. Copper’s moves are shaping up now –


The chart is great news for copper-lovers as well as those who hope for a rebound in commodities.  A break above a multi-year trendline (in red), coupled with the unfurling of all her moving averages (in blue), on good volume (black), all point to more upside to come.


An overbought RSI indicator has to be contended with, to be sure, and likely points to consolidation in the weeks ahead.


But beyond that, there’s clearly more upside.  And after we look at a few open trades, we’ll show you how we want to play it.


Gonna Go Back in Time!


We start with our March 16th initiative, from a letter called Long Legged Copper Trade.  There, we urged you to sell the FCX August 18th 13 PUT for $1.56 and buy the FCX August 18th 13 CALL for $1.55, for a total credit of $0.01.


And today?


The PUTs trade at $0.07 and the CALLs for $2.10.  Buy back the former and sell off the latter, and you pocket $2.04 on nothing expended.  Adjusted for commissions, your gain is 1260%.


Kinda like ice cream.


Next up is our trade from China Wants Trump’s Gas, that appeared in your inbox on the 8th of June.


The letter recommended you buy the UUP January (2019) 25 PUT for $0.82 and sell the UNG January (2019) 6 PUT for $0.77.  Total debit on the trade was $0.05.


Today, the UUP option trades for $1.14 and the UNG at $0.88.  Sell the former and buy back the latter, and you net $0.21 on a nickel laid out.  That’s a modest 420% in just seven weeks.


And now for the finger lickin’ finale!


It’s to our friends at Freeport MacMoRan (NYSE:FCX) that we again turn for this week’s trade, because Freeport was the single best beneficiary of the spike in copper prices this week.


A look at the chart below shows just how powerful the news was that copper breached former resistance.


Have a look –

Aside from an overbought RSI read (in green), it’s clear that the stock has a technically sound posture.  Trending well above all its moving averages, which are, in turn, in the process of unfurling, FCX looks poised to move higher.


But not yet.


The stock’s overbought status will have to be worked off before we see any more appreciable gains.


Which is why we’re opting for a modified calendar spread to play it.

- Content protected for Normandy Executive Lounge, Option Trader Elite, Executive Lounge members only]

Many happy returns,


Matt McAbby

Leave a Reply

Your email address will not be published. Required fields are marked *