Picking the direction of the economy may feel like a guessing game.
But if you follow the right stocks and sectors, you can detect clues about the state of the economy.
Like the price of copper.
Copper appears in everything from wiring for houses and data centers to vehicle batteries. So demand for the metal is sensitive to economic activity.
And that trickles down to the price of copper miners and related producers.
Now copper’s price could be emerging from a trading range that extends back over a year. So the chart of one of the world’s largest copper miners has my attention.
That’s Freeport-McMoRan (FCX).
How the stock handles its recent breakout will tell you a lot about the economy…
Freeport’s Big Breakout
Take a look at the chart of Freeport-McMoRan’s stock below.
Many countries went into stimulus overdrive to support their economies following the pandemic. And along with it, FCX went from trading around $5 per share in March 2020 to $50 in early 2022.
You can see the huge rally on the left-hand side of the chart below:
But once central banks started hiking interest rates to battle inflation, the state of the global economy was called into question. And FCX pulled back after peaking at $50.
Look more closely, though, and you’ll see a pattern emerging amid the noise. The dashed trendlines show FCX in a large triangle pattern.
That kind of consolidation is usually a “continuation” pattern. That just means the stock price typically follows the path preceding the pattern whenever it breaks out.
The chart shows FCX rising before it fell into the triangle pattern. That hinted that FCX should ultimately break higher.
And that’s exactly what happened in mid-March, as you can see with the arrow.
But let’s zoom in and add the Relative Strength Index (RSI) to the chart below.
Some interesting signals emerge before the big moves in FCX.
When FCX was testing and rallying off the lower support trendline, the RSI made a higher low (circled areas).
That ultimately gave way to quick upside following points 1 and 2.
But each time, the RSI hit overbought territory above the 70 level (arrows). And that turned the stock price lower (see points 3 and 4).
With that in mind, where is FCX heading next?
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The Next Move
FCX surged 22% in just three weeks, breaking out far above the upper trendline.
But that same move has pushed the RSI into overbought territory above 70, as well. As we just discussed, that has often led to near-term downside.
If the price pattern repeats and the RSI dives back below the 50 level, that’s a sign of weakness in this key copper producer.
But if RSI holds above the 50 support level and FCX only partially retraces from its big rally, that can lay the foundation for the next big breakout… perhaps to new all-time highs.
Either way, the next big move in FCX will offer savvy traders some important clues about where the economy is heading… and potential trading opportunities as this setup evolves.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict