Caution Required On Fortescue

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

Bottom Line 31/01/17

Daily Trend: Up
Weekly Trend: Up
Monthly Trend: Up
Support Levels: $5.15 – $4.61 / $3.96 – $3.56
Resistance Levels: $7.01 – $7.15 / $8.57
 

Technical Discussion

Fortescue Metals ((FMG)) 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 Headland 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 2016 revenues decreased 17% to $7.08B. Net income increased from $317M to $984M. Revenues reflect the China section decrease of 16% to $6.79B.  Broker/Analyst consensus is a comprehensive “Sell”.  The dividend yield is 2.3%.
 
Reasons to be more optimistic longer term (caution short-term):
→ Debt repayment has gained traction.
→ Cost reduction continues to improve.
→ Spot iron ore prices remain resilient.
→ Commodity price forecasts have generally been revised higher by brokers and analysts.
→ Pilbara has morphed into a world-class low-cost business.

It’s still extremely difficult to find a broker that is bullish FMG with most advocating a great deal of caution. Having said that, this has been their stance for several months as price has continued to bound higher relentlessly. Having said that, we agree in that there is scope to see a deeper retracement albeit it would be futile to try and fight the trend at this stage. First of all, we need to see clearer signs of distribution before getting overly confident in a healthy pull-back taking hold. However, we’ve left our wave count alone for the time being with the recent pivot high likely completing a longer term 5-wave movement from the lows made at the beginning of 2016.

That said, price has now gone well above the 61.8% retracement level of the whole leg down that commenced on the 12th of December last year which keeps the door open for the alternate count to come to fruition. This more bullish wave count implies the recent pivot high only completes wave-3 with recent price action being part of wave-4. This fits with the choppy movement higher over the past few weeks and if this characteristic continues the end result could be a flat pattern or even a triangle. This would set the stage for another thrust higher which should take price up through the zone of resistance once and for all. Just bear in mind that the patterns will need to prove themselves before thinking in terms of the deeper retracement being avoided. The other interesting aspect of the chart is that a push up toward the $7.00 region could lock in a Cup & Handle which in its own right is a bullish pattern.

Trading Strategy

Should the alternate count mentioned above start to prove itself then we’ll be on alert for a buying opportunity over the coming weeks. At the moment though, price is struggling to get through the upper boundary of the zone of resistance meaning some caution is required over the short-term. Ideally the smaller degree patterns will provide a clue over next week or two regarding whether a deeper retracement is required before the trend continues. Either way, bigger picture there still every reason to be bullish although some patience is still required before getting involved.
 

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