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Retracement has me thinking PD will play catch up

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Friday evening I was working with my retracement brackets in the copper/mining sector and found something I thought might be interesting and perhaps bullish for shares of Phelps Dodge (NYSE:PD). Here's a quick comparison of what I'm seeing in the Copper futures market, Phelps Dodge (NYSE:PD) and Freeport McMoran (NYSE:FCX). Both PD and FCX are major copper producers.

Let's start out with the March Copper Futures and try to define a range that may be in play. The range is "defined" by retracement. My thoughts are.... "as copper futures go, so perhaps go the earnings of the copper producers."

March Copper Futures (hg02h) - Daily Interval

The March Copper futures have been hovering around the $0.73/pound level ever since the powerful move above our wedge pattern. If the May 21, 2001 close and recent low defines a range for the copper futures traders, then perhaps one can make the "leap" that a similar range may exist among the copper stocks.

Phelps Dodge Chart - Daily Interval

I really do try and look at charts from an unbiased perspective. However, I don't quite understand why PD is lagging the move in copper. I do see some very similar technicals based on the recent break of the wedge that we saw in the Copper futures, but based on range of retracement, PD "should be" trading up near the $41 level. It is rare that a company like PD would publicly disclose their "hedge strategies," but current technicals may indicated that PD was hedged against a downward move in copper prices and not necessarily benefiting from a recent move higher. In past news released form PD, they did say that they thought copper would hang around the $0.73/pound level for awhile, before supplies were worked down and copper prices were to move higher. If PD were selling the copper futures to hedge a downward price movement, then it may make sense that the stock is lagging based on retracement. However, for an equity bull, it may also give some "comfort" and provide stability in the stock should copper prices pull back. We will have to monitor things going forward, but I do like shares of PD from the bullish side at current levels. If not hedged, then perhaps we see a bit of "market inefficiency" and if corrected, could see PD move higher near the $41 level.

Freeport McMoran Chart - Daily Interval

Another copper producer is Freeport McMoran (NYSE:FCX). The chart of FCX looks very similar to that of the copper futures, but here we see a stock that is "higher" in the range of identical retracement. Again... seeing a little bit of "market inefficiency" where we might think that FCX is a little ahead of the copper market based on retracement.

Perhaps a trader looking for a bullish trade in the group may see Phelps Dodge (PD) as more of a "value" play based on the technicals, and FCX more of a "growth" play and a stock that may be an out performer on an extended move in copper.

Should we see copper prices stay flat and FCX pull back to the $14.08 level, the FCX may be a good stock for trader to pick up on a pullback.

In the market monitor, we've noted that some of these copper stocks are showing good relative strength performance versus the S&P 500 and an area for bullish equity traders to be looking for gains or performance versus the broader market.

Jeff Bailey
Senior Market Technician
Option Investor

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