Trading pure play iron companies

The iron ore price has recently seemed to follow a cyclical price pattern.  Over the last few years, the iron ore price has typically bottomed out between June and September before it makes a new run higher, the exception being 2011 when it didn’t bottom out until the end of October.  This year the trend so far is similar with iron ore falling from $139.70 per tonne in December 2013 down to a bottom of $89.00 per tonne recently, before recovering slightly to a current level of just over $93 per tonne.  If recent history repeats, there is a good chance that we have already seen the low in the iron ore price for 2014.

Technical Analysis:

Atlas Iron has had a terrible year in terms of share price performance; however this has provided the opportunity of a much lower entry point for those with a bullish view on iron ore and the Chinese economy in general.

Recently there was a double bottom observed over June and July 2014, which is a strong bullish signal that the share price may have bottomed in the short term.  Strengthening this view is another strong bullish signal, a positive divergence that occurred in the RSI at the same time, with the RSI recording a higher low in July when the share price showed an equal low.

Source: IG trading platform

Corporate activity:

With BC Iron’s recent takeover offer for Iron Ore Holdings (IOH), and the recently completed joint Baosteel/Aurizon takeover of Aquila Resources (AQA), the iron ore sector is currently one of the hottest sectors of the Australian share market to be involved in.  Atlas Iron has also been tipped in the past to be a prime takeover candidate.  Its recent resource and reserves upgrade will do nothing to harm this theory.

The bear case:

Analysts have been forecasting for years that the price of iron ore will fall from its current multi-year highs on the basis that supply will catch up to demand on the back of large new and expansion projects due to be brought into operation by iron ore companies including Rio Tinto and BHP, which will drive the price back down towards its long term level.

Potential trading idea:

I would potentially be looking to place a buy on stop order above the recent high of $0.735.  In this case I would be looking for confirmation of a move higher before entering the trade.  If I were to buy at current prices I would get a cheaper entry level, but the stock may be confined to the current trading range for some time and the break-out may never eventuate. So in this case I am looking to take advantage of momentum that may eventuate from a price break out.

I would potentially look to set a stop loss just under the recent low.  If the share price falls below this level it is a sign of significant share price weakness as it would have broken through the recent strong support level and would mitigate potential losses.

Once the trade has been entered, I would look to set an initial profit target at around $0.90, this was a recent price support level which may act as a resistance level in the future.

Alternatively I could look at a short trade and profit from a potential move lower. Here, I would look to potentially set a sell on stop order slightly under the recent support level of $.0545.  If the market has moved through my stop and the position filled, I would look to set a stoploss a few cents higher than the support level in case it proves to be a false break.

By Matt Chambers for IG Australia

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