This Miner Could Surprise Traders With A Big Rally

The commodities frenzy in 2007-2008 drove energy and mining stocks up to astronomical heights before the ensuing bear market erased all of those gains.

While energy stocks and precious metals miners were able to rally back, miners of industrial metals stalled. The Dow Jones U.S. Industrial Metals & Mining Index still trades more than 65% below its 2008 peak even after nearly doubling from its worst levels this year.

In short, industrial miners have been portfolio killers for years, and sentiment is predictably rather dour. However, the short-term condition is much improved and the index is on the verge of a long-term breakout.

One of its larger component stocks, Australia-based Rio Tinto (NYSE: RIO), echoes these improvements and is also on the verge of a major breakout.

At first glance, it is easy to see that the stock now trades above its key 50-day and 200-day moving averages, and the 50-day recently crossed above the 200-day in what some might label a “golden cross.” While this signal is really meant to apply to the broader market, it still tells us that the major trend has likely changed to the upside.


This is interesting because the global economy is still plodding along, keeping demand for industrial metals in check and inflation low. Fortunately, as a technical analyst, I do not have to answer the question of why a commodities producer should start to rally in these conditions. What’s important is that the market sees something positive down the road, and technicals often change well ahead of the fundamentals.

Just last week, the head of Rio’s iron-ore business said in a memo that a proposed tax increase on its operations in Western Australia could result in further cuts to jobs and investment. And on Aug. 3, the company posted a smaller-than-forecast decline in profits but cautioned on full-year results.

In both cases, the stock was higher three days later as the market took the news in stride. Good action on bad news is bullish.

Additionally, we have a nice rally since January with a clear supporting trendline. And at the bottom of the chart above, we can see, the on-balance volume indicator continues to set higher highs, telling us money is pouring into the stock despite April’s correction.  

Finally, the stock is in a triangle pattern straddling the falling trendline from the August 2014 high. This is a bullish setup, especially with moving averages now acting as support instead of resistance. Should shares move above the triangle’s upper border in the $33 area, there would be little standing in RIO’s way before reaching major resistance near $40.

Let’s recap: Fundamentally, the company and its peers point to a weak outlook, while investor sentiment is poor following a devastating bear market. Yet, the trend is up this year, and moving averages, momentum and money flows are all pointing higher.

Copper, the industrial metal analysts pay the most attention to, is flat, but the Bloomberg Industrial Metals Subindex, which also includes aluminum, zinc and nickel, is on the verge of breaking through a five-year bear market trendline. Meanwhile, gold is already in a bull market.

Industrial metals miners such as Rio Tinto are poised to surprise to the upside, so be ready for the breakout when it comes.

Recommended Trade Setup:

— Buy RIO above $33
— Set stop-loss at $31
— Set initial price target at $40 for a potential 21% gain in eight weeks

Note: If you’re interested in taking this trade one step further, there is a “backdoor” method you can use to earn five to 10 times more than regular investors on the exact same stock. Learn the secret here.

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