Skip to main content

The Doctor Is In and Probably Isn't Going Away

Copper has had a nice run, and the likelihood the worst of the pandemic soon could be behind us could mean increased consumption ahead.
  • Author:
  • Publish date:
Comments

U.S. dollar weakness has been a recent theme in my pieces as we explore different ways to capitalize on the greenback's recent slide. Today, that theme takes us to the commodities markets.

The recent rallies in certain commodities such as crude oil and copper have multiple tailwinds. Obviously, a global economic recovery would increase the demand for both crude oil and copper. The latter commodity is often referred to as "Dr. Copper," because its strength or weakness can be used to diagnose the health of the global economy.

The less obvious reason for strength in commodities is the falling dollar. On Monday we saw a strong clue that dollar weakness could be more than just a temporary phenomenon.

Since breaking major support just above 92.00, the U.S. Dollar Index has been in a relentless slide. The dollar finally saw some strength on Monday morning, when the greenback hit a three-day high. However, those gains were quickly relinquished as sellers used a rare bout of dollar strength as an excuse to sell.

Notice the length of the upper wick on Monday's candle (shaded yellow). This type of price action indicates a failure on the part of bulls and points toward further U.S. dollar weakness.

Image placeholder title

U.S. Dollar Index (DXY) Source: TradeStation

View Chart »View in New Window »

In theory, a weaker dollar places a tailwind behind any investment vehicle that is valued in dollars. This could be a supporting factor in copper's recent rally to $3.50 after breaking out of a huge cup-and-handle formation.

Image placeholder title

Copper Source: TradeStation

View Chart »View in New Window »

Copper has already had a strong year. Do copper and copper-mining stocks still have room to run?

Take a look at the daily chart of miner Freeport-McMoRan Inc. (FCX) . This stock has gained 87% year to date and has quadrupled since trading below $6 in March. According to its RSI (relative strength index) indicator, FCX has been overbought for the past three weeks (shaded yellow).

Image placeholder title

Freeport-McMoRan (FCX) daily Source: TradeStation

View Chart »View in New Window »

On first glance, this stock has already had an amazing run. However, if we zoom out to the FCX's monthly chart, a massive double-bottom pattern is visible. That pattern projects Freeport-McMoRan to the $40 area. There is significant resistance just below that figure (red dotted line).

Image placeholder title

Freeport-McMoRan (FCX) monthly Source: TradeStation

View Chart »View in New Window »

Because we are analyzing monthly charts, this is obviously a long-term play. In the short term, Freeport-McMoRan could cool down and even pull back.

However, with the Food and Drug Administration's (FDA) approval of a Covid-19 vaccine anticipated later this week, we could be living through the worst days of the pandemic right now. Better days are ahead, and that means increased consumption of copper in the long run.

At the time of publication, Ponsi was long FCX.