Why It Looks like It’s Time to Sell Fortescue Metals Group

What happened to the Fortescue Metals Group share price?

At time of writing, shares of Fortescue Metals Group Limited [ASX:FMG] are up by 4.80% for the day, to $5.03 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. But that hasn’t been the case today. The ASX 200 is down by 0.5%, to 5,874.5 points, where FMG has surged today (explained below):

FMG Share Price
Source: CommSec

The Aussie stock market experienced a six-month correction last year. That said, momentum seems to have shifted in mid-December. The market has bounced following its low, which spells ‘good news’ for Fortescue Metals Group, as seen below:

Fortescue Metals Share Price
Source: CommSec

Fortescue Metals Group outperformed the market since early September. That said, with the market’s latest move higher, the company’s share price has skyrocketed. It’s now surging to fresh yearly highs. That should be expected, mind you. Companies that tend to outperform market downturns tend to rally the strongest, when conditions change for the best.

What now for Fortescue Metals Group?

In my opinion, Fortescue Metals Group offers one of the best short opportunities going around the resources sector today. The company’s balance sheet is under repair and it’s generating good profits. But the iron ore price ― the main contributor to Fortescue Metals Group’s earnings ― seems overextended:

Iron Ore

Source: tradingview.com

The iron ore price has ripped higher since December and is re-testing previous highs. That’s probably why FMG’s share price has outperformed the market. 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. It is also worth considering that there was recently a major disaster at one of Fortescue’s competitor’s mines in Brazil.

But there’s more to the story.

The iron ore price is now trading around the US$76–78 per tonne level. This is a major resistance zone. Put differently, the iron ore price may struggle to move higher from here. If that’s the case and iron ore pulls back during Chinese New Year ― a holiday period this week — Fortescue Metals Group’s share price could reverse sharply in the days ahead.

The bottom line: Fortescue Metals Group’s share price looks strong today. But considering the strong market rally and the Chinese New Year, I believe it’s time to sell the company today. Focus on what happens with the iron ore price over the coming days. If it starts pulling back during the Chinese New Year, FMG’s share price could pull back towards the $4.50 level at a minimum.

Regards,

Jason Stevenson,
Resources Analyst, Markets & Money


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