This year has seen the price of iron ore nearly halve in value. Traders have been anticipating a low in stock prices only to find that they continue to plummet to even lower levels. Higher cost producers such as Atlas Iron (AGO), Arrium (ARI), and BC Iron (BCI) have seen the majority of their market caps disintegrate as the iron ore price continues to fall. The big end of town hasn’t been immune to the bleeding, but when the dust settles, the lower cost producers are more likely to be the last ones standing.
One of the lowest cost produces in the world is Rio Tinto (RIO). While the negative effects of a falling iron ore price are clearly having an effect on the share price, RIO has also been in the news for other perhaps more positive reasons. Glencore’s CEO, Ivan Glasenberg has been reported in the press to still be considering some sort of mega merger deal with RIO. Having said that, can we learn something from the chart of RIO? Can we anticipate an end to the current downtrend?
Since the beginning of 2013, RIO has provided us with the same reversal pattern on two occasions to indicate that the uptrend was over. On this weekly candlestick chart, I have circled with a solid line where RIO peaked in 2013 and then once again in 2014. Both patterns are what are known as a “bearish engulfing pattern”. This is where the share price of RIO opens the week above the body of the previous candle but by the end of the week it has finished below it. This dark candle engulfs the body of the prior candle. When you see this occur after a stock has been trending up for a while, then it could indicate the end of the uptrend. In both cases this proved to be correct. Now, if we look at where RIO is currently trading at, you will notice that by drawing an uptrend line connecting the prior two lows, the share price is now sitting on that line. This means that currently there is support for the RIO share price at these levels. I have also circled the prior two candles on the chart. Looking at the dotted line circle, you will notice that the body of the most recent candle is wholly contained within the previous dark candle. This is what is known as a “bullish harami”, or users of bar charts will recognise it as an “inside week”. Either way, it is also potentially signifying the end of the current downtrend. There are no certainties of course, so it will be very interesting to see how RIO trades from here and whether we receive “confirmation” of the reversal by seeing RIO edge higher.
|Michael Gable is a member of the Australian Technical Analysts Association (ATAA). The ATAA is a not-for-profit association that has the primary aim of promoting the correct use of technical analysis. Membership consists of both professional technical analysts and private individuals who use technical analysis to assist with decisions related to trading and investing in the financial markets.|