No stock in the market took off like Fortescue Metals (ASX:FMG) did last year.
It jumped from $1.77 to $2.25 in one week during 2007. And it kept rallying until recently. FMG’s year-high was $13.15 on June 25 this year.
Basically, the stock rose by 643% in 15 months.
That kind of explosive trading speaks for itself.
But recently, gravity exerted itself. In just a bit more than a month, Fortescue Metals has given back half of its initial rally (between point A and point B). On August 5 and 8, the stock reached the 50% Fibonacci retracement ratio of the initial bullish trend, around $7.45.
Click chart for a larger version.
That caught our attention. It’s often a good spot for a rebound, that 50% mark.
However, if you’re thinking of buying FMG on a bounce, first the current trend has to change. It’s dropped like a stone tied to a rock.
So…how do you figure out what the current trend is doing?
With a momentum indicator. Let me introduce a new one…the Money Flow Index (MFI). It’s marked out below that chart.
The Money Flow Index measures the strength of money flowing in and out of a stock. It’s a bit like the Relative Strength Index (RSI). But the Money Flow Index accounts for volume action. Our old pal the RSI only covers price action.
Traders and technical analysts watch for opportunities. One that they keep a look-out for is when the MFI moves in the opposite direction to the price. This very often means trend reversal.
That has already happened. Check out the chart again. Since July 9, Fortescue Metals has gotten cheaper. The Money Flow Index has turned upward. It’s most likely the end of the trend. A rebound beckons.
The MACD is also about to cross above its signal line. It’s been scraping the bottom for a while now. A higher closing price today would confirm that the bears are turning bullish. So we’re waiting on that move today.
Yesterday the closing price was $7.87. With a rebound, the next target should be the 23.6% retracement level of the trend occurred between A and B. In this scenario Fortescue Metals would skip up to $10.50 in a few weeks. That’s a quick 33%.
That $7.45 level is the current support. A break below this level would give some further bearish momentum…and would probably drive the price towards $6.10, the next support level. But there’s more upside than downside here at the moment.
Good investing,
Gabriel Andre
