At the time of writing, shares of Fortescue Metals Group Limited [ASX:FMG] are down by 4.03% for the day, to $4.13 per share.
Why did Fortescue Metals Group shares do this?
Fortescue Metals Group is considered a large-cap company and tends to move with the overall market. That makes sense. The ASX 200 Index is currently trading higher today, up by 15.4 points to 5751.4 points:
For the past few weeks, the ASX 200 has been in freefall towards support at the 5,600 zone. That level dates back to the July 2016 high. It’s putting in a nice bounce last week. That said, momentum is slowing down and we’re potentially seeing the market re-test the recent low in the 5,600 zone. The end of a correction should spell good news for Fortescue Metals Group. The company has held up relatively well during the latest market turmoil:
Fortescue Metals Group’s share price consolidated since early September, mostly stuck in a 40-cent range. But, as you can see on the chart above and as we’ve warned many times over the past few weeks, we’re seeing a break out of the consolidation range. The breakout started after the US midterm election. However, we did see a pullback to major support at $4. Technically speaking, we’re seeing a perfect re-test of major support.
What now for Fortescue Metals Group?
Fortescue Metals Group offers one of the best opportunities going around the resources sector today. I believe we could see a swift short-covering rally to $5 per share into year’s end. But, for the share price to truly take off, we really want to see the overall market move higher to signal the correction is over. At the moment, the overall market still hasn’t given the all clear.
It still poses risks to the downside.
That doesn’t mean you should write off FMG, mind you.
It looks like a good buying opportunity around the $4 per share level. You could make 10–25% on your money within a few weeks, assuming this bounce plays out as expected.
Let’s take a look at the iron ore price ― the main contributor to Fortescue Metals Group’s earnings:
The iron ore price has exploded in the last few months. That’s possibly why FMG’s share price looks ready to surge higher into year’s end, given the reasonably weak market environment. In that case, given iron ore is the main source of Fortescue Metals Group’s revenue, a rising iron ore price is positive for the company.
The iron ore price appears to be moving towards the US$76–78 per tonne level. If that happens and the ASX 200 starts turning around, Fortescue Metals Group could see a sharp bounce towards that $5 price target into year’s end.
The bottom line: Fortescue Metals Group’s future is mainly dependent on the overall market today, rather than the iron ore price. But the iron ore price is helping. In that case, pay close attention to the share price: we could see a short covering rally with the iron ore price to $5 per share, if the market starts to reverse higher soon.
Resources Analyst, Markets & Money
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