Why a Short Covering Rally Looms for Fortescue Metals Group

At the time of writing, shares of Fortescue Metals Group Ltd [ASX:FMG] are down by 1.64%, to $3.90 per share.

Why did Fortescue Metals shares do this?

Fortescue Metals is considered a blue chip company and tends to move with the market. That makes sense. The ASX 200 Index is currently down by 52.9 points to 5852 points:

commsec graph

Source: CommSec

The ASX 200 rallied to retest resistance at the 6,300 level and couldn’t meaningfully break out. The market dropped causing a mini panic and looks to be in the process of bottoming ― there’s strong support around the 5,800 level. The end of a correction should spell good news for Fortescue Metals. The company has held up relatively well during the latest market turmoil:

commsec graph

Source: CommSec

Nonetheless, Fortescue Metals remains in a downtrend ― a negative. We’re seeing Fortescue Metals consolidate around the high $3 zone, attempting to break resistance at $4 per share. At this stage, the risk-reward favours the short side around these prices ― the trend is your friend.

If you’d like to know which ASX resource stocks are worth keeping an eye on, check out my top picks here.

What now for Fortescue Metals?

That said, if Fortescue Metals breaks through the $4 level and reverses trend, we could see a swift short-covering rally to $5. For the share price to take off though, we want to see the overall market bounce to signal the correction is over.

Let’s take a look at the iron ore price ― the main contributor to Fortescue Metals’ earnings:

trading view graph of iron ore

Source: tradingview.com

The iron ore price is taking off, after trading sideways for months. It’s now trading near resistance, so there are question marks regarding whether the price will surge further. That said, iron ore is trading booming and that has reflected in Fortescue Metals’ share price during the share market correction. In that case, given iron ore is the main source of Fortescue Metals’ revenue, a rising iron ore price is positive for the company.

The bottom line: Fortescue Metals’ future is mainly dependent on the overall market today, rather than the iron ore price. In that case, pay close attention to the share price: we could see a short covering rally with the iron ore price, if the market starts to reverse higher.

Regards,

Jason Stevenson,
Resources Analyst, Markets & Money

PS: Interested in mining stocks? My free new investor report, ‘The Top 10 Mining Stocks for 2018’, does exactly what it says in the name. I look at 10 companies that could make you huge money this year, and beyond. To download that report free, go here.


Jason Stevenson is Markets & Money’s resource analyst. He shares over a decade’s worth of investing and trading experience across resource stocks and commodity futures and options. He originally studied accounting and finance at Curtin University, where he was awarded a first-class honours degree. His professional background stems across high-net-worth, top tier accounting (corporate finance, tax and auditing), and sell-side equities research. Before joining the team at Markets and Money, Jason worked at boutique firms which advised fund managers and high-net-worth clients on where to invest. Whether it’s gold, crude oil, copper or an obscure metal like vanadium, you can rely on an in-depth analysis in Markets and Money. Jason also brings you extensive macro, political and geopolitical analysis from around the world. He leaves no stone unturned when it comes to telling the truth. Jason is also the lead analyst of Gold Stock Trader, a premium service for investors serious about precious metal stocks. Websites and financial e-letters Jason writes for:


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