Iron Ore Recovery In 2013?

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Bottom Line 22/11/12

EW Trend: Corrective
Price Trend: Down
Trend Strength: Strong

Technical Discussion

LAYMANS:

Around 7 weeks ago we did our first review on Iron Ore, specifically the 62% fines FE Spot (CFR Tianjin port in China) which is priced in AUD per metric tonne. Open/High/Low/Close price data is produced on a weekly basis and therefore our reason for only looking in on the chart every 6 – 8 weeks or so. In our last review we spoke about the influence of China's apparent slow down and therefore the direct link it has had on Iron Ore prices. Especially over the last two years. The downward slide is not that dissimilar to the Shanghai Composite Chart over the same time frames yet a chart that we feel has the potential to be the recovery story of 2013. And if that is the case, expect Iron Ore to also follow suit. In fact the first stages of such a recovery may well be in place right now, and this is something we are going to monitor very closely over the coming months. A China lead turnaround dragging Iron ore with it certainly has a nice ring to it. With a positive flow on effect likely into our Australian markets. China, nor Iron Ore, may not be the 'dead duck' just yet that many are proposing.

TECHNICAL:

I think we need to watch prices very closely here over the coming months. Especially as the depth of the recent recovery run higher off the September lows may be starting to reveal that a major low has been locked in at 86.70. I'm purely looking at this from a technical perspective and based around some very pertinent Elliott Wave readings. Firstly, the depth of the A-B-C corrective pattern since the early 2011 highs, has locked in low at 86.70 which is right in the pocket of the typical 50.0% – 61.8% retracement zone circa 102.00 and 80.72 respectively. Wave equality, lower at 74.40, has yet to be tagged yet attainment of the deeper Fibonacci targets is significant. In our last review we were labelling any move up off the lows as being the start of Wave-iv as part of a 5-wave downside Wave-C move. Yet ideally the move was to remain shallow which is typical of wave-iv's. Yet what we have witnessed in between reviews is a deep retracement that has headed well beyond the 50.0% pullback area which was measuring in at 112.05.  So with 122.80 tagged thus far on this run higher, the wave-iv proposition is starting to look contentious to say the least. The pattern will not be officially negated until the wave-i lows is broken past aligned to 129.90. Yet for mine the signs are there that we could be done with the downside here. The old support / resistance line line at 117.00 was also going to be difficult to push past on first attempt, so some further weakness around present levels based around the technicals at hand, is certainly not out of the question. And in fact is going to be expected shorter term. Our Divergence Indicator is overbought which will also provide some added short term bearish pressures here over the next month or two. Yet it will be how price performs on this dip that will dictate just how price is going to perform now over the medium to longer term. A break down of the lows will obviously put a continued strain on things well into 2013. Yet if a higher swing low pattern can trigger post any upcoming dip, then our view is that the metal could well and truly be on its way to a recovery. So we watch the dip with very keen interest from here.

Trading Strategy

The dip in Iron Ore prices has relevance to the dips we have seen in stocks like Rio Tinto ((RIO)), BHP Billiton ((BHP)) and especially Fortescue Metals ((FMG)). I say especially FMG as it is almost exclusively an Iron producer and Explorer. And you need look no further than its price chart to see how hard it has been smacked from 2008 during the GFC , and then again since the beginning of 2011 along with the strong pull back in Iron Ore prices. So from a trading perspective, and basis some form of potential recovery nurturing away here, I'd be keeping a very close eye on the FMG chart over the coming months. Especially as it has proven to be a nice trending stock when it wants to get going.
 

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