MARKETS SPECTATOR: Strong iron, gold doubts

Buyers get ready

The last two weeks has seen a very strong rally in spot iron ore prices and subsequently, the major iron ore miners.

In fact, using Fortescue Metals Group as an example, the stock has surged a staggering 20 per cent in nine trading sessions as the market aggressively re-rated the sector following the continued improvement in Chinese economic data flow.



Source: Iress.

However, all good things must come to an end and despite spot iron ore trading above $US135/t overnight, the major iron ore stocks have come under profit taking pressure today.

However, this will likely set up some nice trading opportunities in the coming days. Normally, we would expect to see profit taking over a couple of days but given the strength of the rally, it would not surprise me at all if we only saw one or two day's profit taking before the stocks began to rally again as participants look to ‘buy the dip'.

Other names in the sector to keep your eyes on include BHP Billiton, Rio Tinto, Mount Gibson Iron ore and Atlas Iron.

Bears starting to fire some shots in the gold market

As gold approaches the end of its 12th year of gains, price action in the precious metal is starting to get even the most bullish pundits a little bit concerned.

Many are still clinging to the hope that gold will climb to fresh highs in 2013, and there has been no shortage of outrageous predictions for the next couple of years. Yet, the factors everyone cites for being bullish – ultra low interest rates, fears of inflation – have so far failed to drive the gold price out of its recent sideways range.

Instead, we're seeing the gold price behaving more erratically and ultimately coming under attack from large sell orders as holders look to offload some or all of their positions in the precious metal.



Source: IG Markets

In the above chart of gold, we note that the precious metal has broken down through the all-important $US1672 pivot point (orange circle), which was crucial support. Now, I'm not expecting the bulls to lie down without a fight so it would not surprise me at all to see gold try and rally back up through this critical juncture.

If it successfully does then it may have been a false breakdown and gold will probably move back up into the $US1700 to $US1750 range. On the flip side, a rejection of the pivot point would open up further downside targets, first towards the support around $US1640 and then a move towards major support around $US1550.



Source: IG Markets

In the above longer term chart, the major support around the $US1550 level is absolutely critical to the continuation of the current bull market. As it stands, gold still looks to be in a consolidation phase within a long term bull market.

However, if it were to break down below the $US1550 level then you could safely assume the bull market was over and the bears had gained control.

The next few weeks are going to be absolutely crucial. If the selling becomes more aggressive, we'll likely see a situation where fear drives more selling.

The contrarian in me tells me the risk is to the downside. Market tops form during times of optimism and bottom during times of pessimism. Everyone's too optimistic for my liking.