Breakout For Orica?

Technicals | Aug 02 2019

Bottom Line 01/08/19

Daily Trend: Up
WeeklyTrend: Up
Monthly Trend: Up
Support Levels: $18.74 – $18.48 / $16.02 / $12.04
resistance Levels:  $28.27

Technical Discussion

Orica Limited ((ORI)) is engaged in the manufacture and distribution of commercial blasting systems, including technical services and solutions, mining and tunneling support systems to the mining and infrastructure markets, and various chemical products and services. The Company's segments include Australia/Pacific and Indonesia; North America; Latin America; Europe, Africa and Asia; Minova, and Global Support. Its Australia/Pacific and Indonesia, North America, Latin America, and Europe, Africa and Asia segments are engaged in manufacture and supply of commercial explosives and blasting systems to the mining and infrastructure markets, and supply of mining chemicals for gold extraction. For the six months ended 31 March 2019 revenues increased 12% to A$2.83B. Net income before extraordinary items was A$32.9M against a loss of A$174.3M. Revenues reflect the Australia/Pacific & Indonesia segment increase of 11% to A$963.3M and the North America segment increase of 13% to A$679.7M. Broker consensus is “sell”. The dividend yield is 2%.

Reasons to be more optimistic:
→ A recovery underway in the Latin American performance.
→ The take-up of electronic and wireless blasting solutions appears to be accelerating.
→ Product rationalisation initiatives being taken by management.
→ The company has reiterated growth expectations in revenue and earnings.
→ Delivery of Burrup improvement will be a key factor over the next 12 months.
→ A continuation pattern looking to lock in.

We had a nice example of a Cup & Handle on this weekly chart of ORI early last month, with price consolidating just beneath the upper boundary of the pattern which was essentially acting as a minor line of resistance. We’ve been waiting patiently for the breakout although this is now a box that can be ticked. The trigger appears to have been an investor presentation on Tuesday, with price gapping higher yesterday, taking price out of the trading range. What we want to see now is the breakout stick as this would open the door to head up toward our target zone as annotated which is set by measuring the depth of the C&H and projecting that distance from the breakout.

Interestingly, if we zoom out to the monthly chart the target area aligns nicely with a zone of resistance which goes all the way back to 2013. Whether that area proves to be significant after such a long period, only time will tell although we’ll come back to that scenario if/when the target zone is achieved. Flipping back to the daily chart (not shown) shows that volume has picked up substantially over the past few days which is ideal, at least as long as high closes continue to be the main theme. One thing we need to be aware of though is the gap that was left yesterday as potentially price may come back to try and fill it. This wouldn’t be the end of the world if buyers step back up at those slightly lower levels. That said, in a perfect world we’d like to see this prove to be a breakaway gap as it would add weight to the immediate bullish case.

Trading Strategy

“…With the bearish divergence no longer an issue I am going to make a formal recommendation this evening. Although there is a case for jumping on following a break higher out of the micro consolidation pattern we are going to be a little more conservative. Initiate long positions following a break up through the line of resistance at $21.40…”   With price gapping higher yesterday, we got filled at $21.58 although that small amount of slippage is neither here nor there in the bigger scheme of things, especially if our target area can be achieved. Keep an eye on the position status page as I will be looking to reduce the risk by moving the protective stop higher if some traction can be gleaned.

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CHARTS

ORI