No Respite For Fortescue

This story features FORTESCUE LIMITED. For more info SHARE ANALYSIS: FMG

Bottom Line 09/12/14

Daily Trend: Down
Weekly Trend: Down
Monthly Trend: Down
Support Levels: $2.47 / $1.69 / $1.16
Resistence Levels: $3.25 / $3.86 / $5.03

Technical Discussion

Fortescue Metals is an Iron Ore producer and explorer operational in the Pilbara region of Western Australia. It is engaged in mining of iron ore from its Cloudbreak and Christmas Creek mine sites. Its Cloudbreak mine site is located in the Chichester Ranges in the Pilbara region of Western Australia which is 263 kilometres south of Port Hedland and 150km north of Newman. Its Christmas Creek is the second mining operation, 50 km to the east of Cloudbreak. The Company has also designed and constructed rail and port facilities to support the development and sale of the Pilbara's stranded iron ore bodies. For the year ending the 30th of June 2014 revenues increased 45% to $11.75B. Net income increased 56% to $2.73B.  Broker/Analyst consensus is currently “Hold”.  The dividend yield is 8.9%.

Reasons to be cautious:
→ The price of Iron Ore remains a drag on the share price.
→ No dividend is expected in 2015.
→ The company isn’t expected to be profitable in FY16.
→ Net debt at the end is FY 14 was US$7.2bn which came in under estimates.
→ A line of support has been smashed.

It would make a pleasant change to say something bullish in regard to Iron Ore stocks like Fortescue Metals ((FMG)), as well as the likes of Atlas iron ((AGO)) and Arrium ((ARI)) which are companies we also cover.  Unfortunately that isn’t the case with the metal itself continuing to remain under pressure.  Most brokers and analysts remain extremely bearish on iron ore although the contrarian in us suggests this could actually be a signal that a bottom is looming.  However, as always we need to see evidence that a turnaround is unfolding which up to this juncture simply isn’t the case.  The downtrend on this particular chart is clear to see with sellers remaining firmly in control.  I’m going to take a look at the weekly chart this evening which shows the significant zone of support which has recently been penetrated.  As always old support becomes new resistance meaning another headwind needs to be overcome before thinking in terms of a decent bounce unfolding. 

If we are scrambling for positives then we need look no further than the volume.  Prior to a reversal volume will often increase substantially which is exactly what’s unfolded here over the past four or five weeks.  That said, we need to start seeing some higher closes before getting overly confident in regard to a low being locked in.  On the daily chart (not shown) we do have some Type-A bullish divergence in play which has likely been the reason for the recent sideways movement although this isn’t going to be providing a helping hand indefinitely.  Once our oscillator heads back into the overbought position (assuming it does) the door will once again be wide open for further falls.  At the end of the day we have to go with the flow, as well as the trend with both advocating continued caution.

Trading Strategy

“…There is definitely no reason to be looking at a buying opportunity at these levels, which will remain the case until evidence of a turnaround starts to show…”  Although the continued decline since our last review hasn’t been significant there’s still no reason to be looking for a trade in either direction.  Yes, lower prices are expected although with the bullish divergence in position now is not the time to be initiating short positions.  A lacklustre bounce on the other hand would provide an opportunity, probably in a week or two’s time.  The best thing we can do here is remain side-lined as there is a good chance that volatility could increase even further.

Re-published with permission of the publisher. www.thechartist.com.au All copyright remains with the publisher. The above views expressed are not by association FNArena's (see our disclaimer).

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