au stock focus potential corrective rebound in fortescue metals after overextended decline 185050201

Technical Outlook on Fortescue Metals Group (ASX: FMG)

(Click to enlarge chart)

Key technical elements

• The medium-term uptrend from 21 January 2016 that recorded stunning rally of 400% for Fortescue Metals to print a recent high of 7.27 on 22 February 2017 has been damaged. Price action has staged a bearish breakdown below its former ascending channel support on 27 March 2017 in line with weakness seen in iron ore prices.
• Interestingly, price actions do not always evolve in a vertical fashion where there will be instances that a mean reversion movement will occur that goes against its prevailing trend. The recent decline has stalled at a significant medium-term support of 4.99 which is defined by a confluence of elements. The pull-back support from 17 January 2011 high, lower boundary of the current bearish descending channel in play since 22 February 2017 high, the 38.2% Fibonacci retracement of multi-month rally from 21 January 2016 low to 22 February 2017 high and close to the 1.382 Fibonacci projection of the decline from 22 February 2017 high to 13 March 2017 low.
• Positive elements have emerged at 4.99 support; a “Bullish Piercing” candlestick patter, the daily RSI oscillator has inched up close to its extreme oversold level at 22% and still has room for further potential upside before it reaches its significant descending trendline resistance. In addition, today’s volume (28 Apr) has a significant increase by around 70% from the past three days.  These observations suggest that medium-term upside momentum of price action has surfaced.
• The significant medium-term resistance stands at the 5.87/6.00 zone which is defined by the upper boundary of the bearish descending channel, the gap seen on 12/13 April 2017 and the former swing low area of 30 November 2016/09 January 2017.

Key levels (1 to 3 weeks)

Intermediate support: 5.20

Pivot (key support): 4.99

Resistance: 5.87/6.00

Next support: 3.65

Conclusion

As long as the 4.99 pivotal support holds, Fortescue Metals is likely to see a mean reversion corrective rebound towards the 5.87/6.00 resistance before it faces the risk of another downleg.

However, failure to hold above 4.99 may invalidate the preferred mean reversion rebound view to see the continuation of its medium-term down move to target the next support at 3.65.

Charts are from eSignal

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