Iron Ore outlook - can it go lower?

Iron Ore outlook - can it go lower?
By Ric Spooner (Chief Market Analyst, CMC Markets)

The spot Iron Ore price is now a key driver for major markets including the Aussie Dollar, the Australian 200 index and the big resource stocks. Technical analysis can be a good reference point on where the markets may be heading.

Ric Spooner, Chief Market Analyst at CMC Markets, discusses his thoughts on the technical outlook:

Have we seen the low? Technical analysis suggests we may move below $86.70
Is the recent rally to $109 only a correction?
$117 per tonne is a key level – if we get through that correction, the price may go higher to $130

Iron Ore Daily - 62% fines Index. CFE Tianjin Port. Source: Bloomberg

If you are having difficulty viewing this chart visit http://blog.cmcmarkets.com.au/2012/09/20/iron-ore-chart-outlook-update/

The scenario on the chart above suggests that we’ve just completed a large 5 swing decline. This is outlined in red numbers. This decline may itself only be the 2 to 3 decline of a bigger structure (see black numbers).

The green line is the 200 day moving average. Although this puts the overall trend as down, we recently got a long way below it suggesting some degree or reversion towards the mean is in prospect. A similar thing happened with the corrective rally from the low at red "3" to the peak at red "4".

It seems to me that the dashed "overlap” resistance line at around $117 per tonne looms as an important level. Pushing up through $117 would be a show of strength. An overlap through that level makes it more likely that we are in for a major correction of the whole swing down from black "2" to black "3". Perhaps back to the vicinity of the 200 day average again.

Unless and until price pushes above $117 though, there is a real possibility that all we are doing is correcting the move down from what I have currently labelled as red "4".

Interestingly, the price is currently stalling at a Fibonacci cluster zone. If it falls away from here that would be looking very like an ABC correction of the swing down from "4", setting up for another move below the recent low at $86. This would presumably be a bearish scenario for the Aussie Dollar.

This Fibonacci cluster consists of:
38.2% retracement of the swing down from "4"
Projection that the swing up form "b" to "c" will be the same size as the swing from black "3" to "a".

The difference between these two scenarios (i.e pushing above $117 or failing below it) is really only about how deep the current corrective rally will be. If the swing counts on the chart are basically correct, the chances are there will be another leg down below black "3" to complete the whole major 5 swing decline.

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