At $26.7 billion, Rio Tinto (RIO) clocks in at Australia’s eleventh largest listed company. RIO is also listed on the LSE and NYSE, with its mining assets spread across the globe. RIO’s share price suffered enormously during the 2008 bear market, falling from an adjusted high of just under $125 (pre a share split it nearly reached $160) to a low of $23.59 and has recovered around 38% of that fall.
RIO chart
The 10-year weekly chart below shows the formation of a long-term symmetrical triangle, where RIO’s share price has experienced lower highs and higher lows, depicted by the black trend lines. Typically, lower highs are bearish and higher lows are bullish. Which will win out? The bearish lower highs, or the bullish higher lows? Technically, when a symmetrical triangle forms, a breakout occurs when the triangle starts nearing its apex. That time is nearing and may occur any time from now to about two or so months from now.
The question is: in which direction will the breakout occur? A symmetrical triangle is typically a continuation pattern. With long-term symmetrical triangles, the prior direction is not always clear, as is the case with RIO. Cases could be put forward for both but I would lean towards it being down.
Source: Beyond Charts
Broadening our analysis to further clarify the situation, there are two major support and resistance zones that have formed over the last eight years, the two blue horizontal rectangles in the chart above. When the breakout does occur, it is likely that either of these two zones will support, from below, or resist, from above, the next share price move. The next long-term directional move may only really be known when a clear breakout has occurred out of either of these two zones.
How does the iron ore price affect RIO’s share price?
The weekly chart below is based from February 2009. The blue line is RIO’s share price movement and the bar chart that of the iron ore price.
Source: Beyond ChartsI’m sure that the close correlation between the two in shape and direction needs no pointing out. There is a discrepancy that exists between RIO and iron ore right now. The odds are that the RIO share price will follow the iron ore price, which would cause RIO’s share price to breakout on the downside. In the first chart above, this would mean a break below both the lower trend line of the symmetrical triangle and the lower blue horizontal support zone. Will RIO be able to swim against the iron ore tide or will its share price be locked into the ebb and flow of the iron ore price?
Whilst the probabilities are for a fall in the RIO share price, any other variable could pop to the fore and have a bigger effect than those discussed above. Therefore, while RIO resolves its price oscillation, it would be prudent to wait for the next directional move to take place before deciding what action to take.
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.
Follow the Switzer Super Report on Twitter
Also in the Switzer Super Report:
- Peter Switzer: Dollar driving dividend stocks
- Paul Rickard: LICs or ETFs – what you need to know
- James Dunn: The battle of the retail giants – WOW vs WES
- Rudi Filapek-Vandyck: Buy, Sell, Hold – what the brokers say
- Penny Pryor: Shortlisted – 6000 targets and Harvey Norman
- Staff Reporter: Spring shines on property market
