I often get asked “when is a good time to buy shares in Fortescue (ASX:FMG)?”. Having endured a very soft few months, the Fortescue share price appears ready to launch higher again.
The price of iron ore looks to end 2017 at a higher level than where it started. Despite this, we’ve seen a negative performance from Fortescue this year. Much has been made of the discount that the company sells its ore at. Fortescue produces a lower quality ore. Because of this reason, it has to sell it a lower price. Unfortunately, that discount has crept higher over time. Not only that, but it is staying higher. This has been a drag on the share price. Perhaps its now getting overdone?
Looking at the chart, we may have reached a point where the stock has been oversold and is ready to launch higher again. With a positive backdrop of a falling AUD, and a high dividend (over 13% including franking) amongst others, investors seem to be ready to pile into Fortescue shares again.
Fortescue weekly chart
Firstly, if you look at the weekly chart below, you will notice that after breaking the downtrend in mid-2016, Fortescue has come back to retest that line, finding support at these levels.
Fortescue daily chart
When we zoom in to a daily chart, we can see another interesting set-up.
Having fallen for the last few months, the sell-off started to slow down a few weeks ago. This recent price action resembles that of a falling wedge. A falling wedge can signify a low, and that seems to have occurred right near the previous low in June. Having retested that low, the stock then jumped higher out of the wedge (circled). It is still early days but if the shares start to push higher in the next few days, through $4.80 and possibly even $5, then we can safely assume that a recovery is underway. The first level of resistance could occur near $5.50, and clearing that opens up the possibility of levels above $6 again.
The next few days will be crucial to see if we are right and if the flow of money is coming back into Fortescue, then investors could do well to follow it.
Current share prices available here.
You can learn more about technical analysis in this article.
Michael Gable is managing director of Fairmont Equities.
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