Rio Tinto (RIO) is a world leader in finding, mining and processing the earth’s mineral resources and is listed on three stock exchanges – ASX, LSE and NYSE. Like most resource companies, RIO’s share price has been in decline for three years since February 2011. However, over the last three months there have been early signs of a potential change in RIO’s share price.
Price breakout
The three-year weekly chart below shows the price action as it has unfolded. The falling and rising black trend lines show a long-term symmetrical triangle of lower weekly highs and higher weekly lows. Also depicted in blue are two long-term support and resistance zones that date back to 2005 (off the left of the chart). The combination of these two simple technical analysis techniques help us gain an insight into the RIO share price setting up for a potential breakout to the upside, or downside.
At the end of June 2013, the weekly price closed below the rising black trend line, but the fall was arrested by the support zone between $52 and $55. Price rose back into the symmetrical triangle and above this support zone. Price continued to rise towards the resistance zone between $62 and $65 and the declining black trend line.
At the end of November 2013, the first breakout to the upside above both the resistance zone and the declining trend line occurred. Since that breakout, the Rio weekly share price has closed below the declining trend line just once and has completed a second new high since the breakout.
The last two weeks has seen the Rio share price fall sharply back to the old resistance zone, which has now become a support zone. Whilst Rio’s share price remains above the declining black trend line, does not fall below the bottom of the $62 – $65 support zone and does not fall below its previous low of $62.89, then the probability of Rio rising remains high.
What is the risk?
If these three criteria do not hold, then for the upside to still be a possibility, although at a lower probability, the Rio share price will need to remain above the rising black trend line, $58, or, as a last resort above the lower support zone of $52.
Given further evidence, such as the Continuous Commodity Index rising strongly (see the Switzer Super Report story from two weeks ago [1]), a slow but building switch of funds from industrial and banks stocks into resources stocks and other resource-based exchanges starting to perform better, there is a high probability that the Rio share price should continue to rise.
More cautious investors should wait for Rio to make a new high above $71 but those prepared to act on dips may consider a longer-term position on this current dip.
Remember that there are no guarantees, so a stop loss should be placed below $52 to limit losses should the RIO share price fall for any reason, including any new negative information that may become known in the future. Remember the RIO price fell 80% during 2008 from $125 to $25!
Gary Stone is the founder and managing director of Share Wealth Systems.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report:
- Peter Switzer – How long can this bull market last? [2]
- Paul Rickard – Gold and mid-caps lead the market higher [3]
- Penny Pryor – Shortlisted [4]
- Geoff Wilson – The greatest reality show on earth – the stock market! [5]
- Rudi Filapek-Vandyck – Buy, sell, hold – what the brokers say [6]
- Penny Pryor – A long weekend for the property market [7]
- Penny Pryor – Super news – concessional caps lifted [8]