Technicals | Feb 06 2012
LAYMANS:
In our last review we suggested that Fortescue Metals ((FMG)) had traveled a little deeper than what we have liked to have seen, but regardless the technical outlook remained on track for higher prices. The all important $4.23 level held and prices have made good headway toward out target price at $5.50. This small congestion, taking the shape of a micro triangle, is a healthy breather before another push to attain the wanted level. For ongoing strength we now do not wish to see $4.85 penetrated on the downside. On the upside there is strong horizontal resistance circa $5.50. Broad price action since last October has been corrective in nature, meaning we're seeing a bounce and not a new trend higher. I would be very wary of buying below this line of resistance and could only start taking a more optimistic view if price scorched through $5.50 without any hesitation. That remains to be seen and is improbable.
TECHNICAL:
Since the lat review prices have impulsed higher in what appears to be a small 5-wave structure within wave-(c), quite a common expectation. There is some minor resistance here as prices coil, but if we're seeing a 5-wave pattern we'd view this coiling as a wave-iv triangle that should precede one last push higher. Volume is waning during this pause which is a very positive sign. Wave equality, where waves-(a) equals -(c) stands at $5.61, just a fraction above the more important resistance line. Not being a well defined line we'd be better of suggesting that its a 'zone' of resistance and for all intents $5.61 could be tagged. Unless prices can zip straight through, it is more than likely that FMG is either going to turn lower once again or start building a large base from which it will start moving higher at some stage in the coming months. I feel with the general market stance the latter is more probable, but even so I'd be cautious with maintaining long positions through $5.50.
Trading Strategy
3/3:
"Longer term traders, especially those that like the FMG story, perhaps a tentative buy right here with tight stops below $4.20. We certainly don't want weakness through there. Best upside potential at this juncture is $5.50, but again this would be viewed as an aggressive play." If you took the aggressive stance then adjust stops up to $4.85 and ensure to take profits at $5.50. As mentioned above, we view this strength as a bounce rather than the start of a new uptrend. For a larger trend to become more priominent I would (a) need to see the resistance broken, (b) that break to be followed by a perdiod of consolidation.
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