Pure plays looking to break downtrends

As we approach the end of the financial year, fund managers tend to partake in what has become known as window dressing.

Source: Bloomberg

Given the significant underperformance we’ve seen in some of the materials plays over the past few months, it wouldn’t be a surprise to see some investors pick up some of these stocks at lower levels. With banks having paid out dividends and funds selling stocks that have done nothing for them, there could be a bit of free cash floating around, looking to pick up good value companies at lower levels.

Following the big slump in iron ore, there were some pretty sharp drops in the iron ore pure plays. Iron ore has been on the recovery path as China concerns somewhat abated following some calming measures. Cuts to RRRs and boosts in infrastructure spending have been some of the recent measures taken by China. Comments by Premier Li suggesting the country will achieve its growth target and will not have a hard landing have also helped.

Already we are seeing some good signs of improvement in China economic data and this is likely to continue in the near term. Just today, China’s HSBC flash manufacturing PMI bounced back into expansionary territory and this resulted in good buying interest in the iron ore miners. Some of the ones to keep a close eye on in the near term as we approach the end of the financial year are Atlas Iron (AGO), Arrium (ARI) and Mount Gibson (MGX).

AGO had been in a firm downtrend since early April and this saw the stock trade from around $10.9 all the way down to 58 cents where it traded last week. The stock then managed to bounce off those lows and had a crack at breaking this downtrend. With this resistance broken, AGO is now extending its gains above the 60 cent level. Today the stock is testing the 23.6% retracement of the April-June downtrend and if it manages to close above that, 70 cents will be the next key level to look out for. Beyond that, the 38.2% retracement is at 75 cents which is likely to present some resistance.

ARI has been in a downtrend since February which has taken it down from above $1 to lows below 80 cents. The stock finally popped back above 80 cents and also above the downtrend resistance today as it traded all the way up to 86 cents. A close above this downtrend could mean further gains are on the cards with key resistance at $1.

MGX has also faced a downtrend resistance since April which saw it trade from 92 cents to 63 cents. The stock is testing its downtrend resistance today and a close above it, around 74 cents, would be a positive sign. However this stock seems a bit more sluggish than the other two, potentially because it didn’t drop quite as rapidly. Having said that, it still deserves some attention.

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