At the risk of going overboard on the iron ore theme with the blog this week, I think the RIO chart is worth discussing. It looks to me to be forming a “3 drives to a low” pattern. This can be an effective indicator for a bullish reversal. We haven’t featured this pattern on the blog for quite a while so I thought readers might be interested in a post to back up Mike’s earlier discussion on Fortescue.
As the name implies, this pattern involves 3 declining trend troughs.
You should be able to draw a trend line across the 3 lows, although it is not uncommon for the 3rd low to break the trend line with a brief and final downward spike.
Ideally the 3 drives and the A and C corrections should respect Fibonacci ratios. In the case of this pattern, I’ve put a couple of Fib projections on the chart. The correction back to “C” is a 78.6% retracement of the A/2 decline and if price does stop at the blue trend line the move from C down to “3” will be 127% of the A/2 move.
Like all reversal patterns, this situation basically indicates mounting indecision and loss of momentum after a significant trend. The indications of this are firstly that the trend line across the lows is quite a bit flatter than a trend line you might draw across the lows of the trend leading into the pattern. Secondly the A and C corrections within the pattern overlap well past the lows of the other “drives” and are quite large corrections.
Given that the trend line and the 127% projection exactly coincide in this case, a setup will require the blue trend line to be respected. To confirm a set up here, a typical approach would be to wait for a close above Thursday’s high before entering. A still more conservative approach may be to wait for price to overlap above the low at “2”.
Iron ore prices are falling quite quickly towards the $80-86 support zone I discussed in my post on the iron ore chart on Tuesday. If this 3 drives pattern does trigger it may be indicating that mining stocks are beginning to anticipate a levelling out in the iron ore price.
If we get a set up here, I’ll do a follow up post with thoughts on stop loss management and profit objectives