The stock (ASX:RIO) is still backed by a long-term bullish trend started in early 2007. It has posted low prices during this month of August but found this long-term support and has been bouncing back for 6 days now.
Despite a false break generated by the plunging equity markets one year ago when the subprime crisis blew up, the support line of the bullish trend remains valid. It means that over the long-term, the lows are posted higher. Therefore the slope typically illustrates an increasing price development.
From May 19, which is the historical high price, to August 13, RIO fell by 30%. The fact that the long-term support has been tested and validated twice recently argues for the end of this 30% decrease. The bearish trend is therefore completed. It is likely to open the way to a new bullish trend.
The first bullish indicator is that the price action succeeded to breakout above its resistance line. This resistance line was built by the high prices posted during the 3-months decline (points C, D, E and F on the chart). Each time the price action failed to go higher as there was not enough momentum, not enough conviction from investors to jump further into the stock.
The perspective has changed now as this barrier has been cleared last week. This resistance line was also strengthened by the 40-day moving average which was plot just above and was also acting as a resistance. Last Friday RIO closed at $122.17, well above its 40-day moving average: it’s another bullish signal. The stock has therefore already rebounded by almost 11% since the low of August. There is more to come.
The technical indicators show that a further move on the upside is probable. The MACD has triggered a bullish signal as it has crossed above its signal line. So did the 21-day technical momentum indicator as it jumped above the 100 level. It means that some momentum is building and that more and more money is currently flying into the stock. Both increasing volume and price are creating this bullish momentum.
In this scenario, investors should pay attention to the retracement levels of the recent 3-months decline. Short-term traders may take profit around those levels. The Fibonacci ratios show that the 38.2% level corresponds to $128 and that the 50% level corresponds to $134. These are the first objectives for the current price action.
On the downside, a pull back towards the long-term support line might occur, but only a breakdown below this support level would be a new strong bearish signal.
Good investing.
Gabriel.
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