AU Stock Focus Rio Tinto may see further downside

On Wed 07 Feb 2018, Rio Tinto, a major mining and resources firm will report its full-year earnings for 2017. Based on data compiled by Bloomberg, median earnings estimates for commodities and resources related stocks are set to rise by 60% in 2018 which surpasses the gain expected in the benchmark ASX 200 Index by 6 times.

The rosy earnings expectations on these resources firms are driven by these themes;

• Reflationary environment where commodities prices as indicated by the benchmark CRB Commodity Index that has staged a rally of close to 30% from its Jan 2016 low coupled with a solid economic growth backdrop as seen from global PMI readings on both services and manufacturing sectors.
• A stable growth environment in China.

Rio Tinto’s share price surged by 25% in 2017 and continued its climb at the start of 2018 before it staged a recent pull-back of 7% from its 16 Jan 2018 high of 82.46.

From a technical analysis perspective, the current run-up in the share price of Rio Tinto may have already priced in the positive impact of such fundamental drivers and it now faces the risk of a 5% to 10% medium-term corrective decline (1 to 3 weeks) within a longer-term primary uptrend that is still in place since Feb 2016 low.

• The longer-term primary uptrend in place since 03 Feb 2016 low remains intact.
• Rio Tinto has stage a 7% pull-back from its medium-term resistance of 82.46 which is defined by the upper boundary of the primary ascending channel from 03 Feb 2016 low and the 0.764 Fibonacci projection of the up move from 03 Feb 2016 low to 13 Feb 2017 high projected from 05 May 2017 low.
• The daily RSI oscillator has continued to inch downwards and still shows room for further potential downside before it reaches the oversold region. These observations suggest that medium-term downside momentum of price action remains intact.
• The significant medium-term supports rest at 69.22 (former swing high area of 13 Feb 2017 & the lower boundary of the aforementioned ascending channel) follow by 67.17/65.0 (congestion area of 22 May/28 Sep 2017 + 38.2% Fibonacci retracement of the up move from 03 Feb 2016 low to 16 Jan 2018.

Key levels (1 to 3 months)

Intermediate resistance: 79.50/80.75 (gap)

Pivot (key resistance): 82.46

Supports: 72.50, 69.22 & 67.17/65.60

Next resistances: 88.55/90.00

Conclusion

Rio Tinto now faces the risk of a medium-term (1 to 3 weeks) corrective down move to retrace some of its gains from the magnificent rally of 127% recorded from 03 Feb 2016 low.

Therefore as long as the 82.46 key medium-term pivotal resistance is not surpassed, Rio Tinto is likely to shape a further potential down move to target 72.50 follow by 69.22 next. On the other hand, a clearance above 82.46 should invalidate the corrective decline scenario to open up scope for an extension of the up move towards the major resistance of 88.55/90.00 (swing high area of Feb 2011 & the 1.00 Fibonacci projection of the up move from 03 Feb 2016 low to 13 Feb 2017 high projected from 05 May 2017 low.

Charts are from eSignal

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