Chart of the Day: iron ore

by Chris Becker

Today I want to take a technical look at some of the major and junior iron ore miners listed on the ASX. Five to be exact:

I use a fractal method at analysing price action, that is, using monthly/weekly charts for overall price and daily charts for short term activity (and hourly/30 minutes for day trading).

Let’s look at the weekly charts with pure price (well candlesticks – a better visual representation then just closing prices) – here’s spot iron ore going back to 2009:

And heres a shorter term daily chart – I’ll speak to these a bit later, but I’d say the current trend is obvious, with tentative support just below $90 coming up soon:

BHP and RIO have very similar setups in terms of weekly trends, support and resistance (places where buyers decide prices is cheap enough and sellers think its had enough and take profit) and volume.

RIO is currently in a weekly downtrend having bounced down from resistance near $70 and left unchecked, is on its way to $50 per share – its terminal support since late 2012. Note the decline level of volume, something I touched on about BHP yesterday as institutions are currently underweight miners.

BHP at least has some short term support which is slowly rising in step with its 200 day moving average (the red line in all these charts). But that resistance level overhead at ca. $39 per share is a big weight on the Big non-Australian. Declining volume and a lack of catalyst – save maybe oil prices – means there is no “market torque” being applied here.

Onto the juniors, if you could call FMG that:

What a wild ride – remember, thats a weekly chart! Yesterdays 2% drop in FMG is not unusual at all. FMG is tracking the falls in the spot iron ore price, but has come up against a well known support/resistance level at approx. $4.30

The current pattern is actually bullish nominally, with a falling wedge forming around that level. However, another run down to terminal support at $3 per share is on the cards, particularly if iron ore drops below its own terminal support.

Remember, the effect on the iron ore spot price to that of the junior iron ore miners is not linear, but exponential, due to their different margins compared to BHP and RIO.

AGO shareholders are in a world of hurt (I must admit I have profited from shorting AGO, apologies, but I need to pay the bills too):

This is a shocking performance – but a beautiful lesson in risk management for any share investor. AGO has broken through terminal support at 70 cents and could go down to half that in a blink. Only a major rally in spot iron ore (well above $100 per tonne) could save Atlas, IMO.

And MGX shareholders – hopefully not the same people – although there has been a reprieve recently, showing there are significant opportunities in long and short trades:

MGX broke through a significant multi year downtrend in August last year – a very good time to be short-term long iron ore stocks (guilty – some good signals all round, also reading HnH daily iron ore helped here too!). The steam has gone out of MGX’s ride north but price has decelerated recently to just above support around 70c per share.

In conclusion, its hard not to be bearish about iron ore stocks, with the exception being BHP, for obvious technical and fundamental reasons (it can be extremely profitable at half the current spot price, the others cannot) and perhaps FMG and MGX on any short term bounce in spot iron ore for those “quicker” investors (all investing is trading IMO).

Classic lessons here about risk management for individual investors. Not sure those in charge of economies are listening though.