Anglo American (AAL) is a stock I’m sure you will be familiar with. It is one of the bellwethers for the mining sector, and owner of the De Beers diamond company. It also bought out the previously listed Sirius Minerals, the Yorkshire-based polyhalite project, for 5.5p – a figure that many felt undervalued the company. But in the stock market, equity is only worth what somebody else is willing to pay. And at that point in time, Anglo American was the only game in town.
Sirius Minerals highlighted the dangers of investing in a good story, as the stock had a popular retail following among the local population. The difficulties it faced in being able to fund its exciting development also shows the importance of investing in companies that are adequately financed to deliver on their investment promise. In the immediate rally after the miner’s failed $500m bond offering (and therefore failing to unlock the $2.5bn JP Morgan loan to build out the Woodsmith mine) traders saw an excellent opportunity to short Sirius’s shares.
This was because everyone knew the company would be out of cash within the year, and was now fully reliant on tapping shareholders for a cash injection through equity. That was, of course, until Anglo American swooped in with a low-ball (albeit premium to the then-current share price) offer for the company. The deal made a lot of sense for Anglo American – it picks up a project on the floor and as a global business has the clout and financial backing to bring it into production.
Anglo has had its own share of problems in the past, too, though. In the 2015 mining rout, we saw many mining companies' share prices smashed to smithereens, as worries about China’s growth and sinking metals prices affected their producers’ bottom line. Like others, Anglo American suspended its dividend and planned to sharply cut its workforce, as well as intending to close up to 35 mines. These might sound like drastic measures now, yet the stock had lost over 75 per cent of its value during the 2015 calendar year. I’m looking at the patterns then to work out a plan to trade the stock now.
Looking at Chart 1, we can see the steep decline from October 2014 in the stock. The clue for a fall was that the stock had broken through all of its moving averages and couldn’t rally. All of the moving averages were pointing downwards and the stock had all the hallmarks of a stage four downtrend. We can see also that in the turn of 2016 the stock started to pick up in volume.
We know this shows shares swapping hands; whenever there is an increase in volume, as traders we want to be taking notice. Increases and spikes in volume tell us that interest is returning in the stock. We may not know the reason why this is, but if we think of an engine then volume is the revs in the stock. Higher volumes often see an expansion in volatility.
As you will no doubt be aware by now, I am a firm advocate of the cup-and-handle pattern, and this shows itself in Anglo American in 2016. We can see the stock test the 200-day moving averages, and fall back, only to break through and form the first handle. The stock rallied but couldn’t hold and eventually fell back through the support zone (previous resistance). However, the stock formed another handle within an even bigger cup, and aside from two retests (we looked at these in ‘Trading the Breakout’, IC, 19 September 2019) it surged higher. Traders would have noted that the price was above all the moving averages, which were by that time pointing upwards, and that a new trend was potentially under way. Quite often traders like to overcomplicate their entries and exits, but simple indicators used with volume to gauge supply and demand in the stock can be incredibly effective. Trading is essentially the speculation around supply and demand within a specific security, and although technical analysis is in no way an indicator of the future, it does allow us to identify new trends and get on board.
By following the trend from the breakout of the cup and handle until the breakdown through the 50-day exponential moving average (EMA), this would have netted close to a 60 per cent return in less than a year – not a bad return for a FTSE 100 company. Often, the best buy point is multiples higher than the low – this is because we want to be trading the trend and not gambling on the bottom.
If we look at Chart 2, Anglo American has recently been through a similar fall in the first three months of 2020. The stock has been volatile, but such a gapper that holding an overnight position could have been disastrous for any trader. In March, I was regularly going flat at the end of the day in order to protect my account. Large volatility is great when it’s on your side, but being caught severely offside can damage both your account and confidence.
Looking more closely, 1,900p appears to be recent resistance for the stock. We are seeing higher lows, and the stock forming an ascending wedge. If the price falls out of the wedge then we know that the stock is not ready to go higher, whereas a break of the 1,900p resistance level would signal a potential new trend – especially if all of the moving averages can turn further upwards.
It's also worth noting that the stock is nicely up from its lows of just above 1,000p. The bulls have beaten back supply for now, and the stock is set to make another move.
Should the price take out the 1,900p level I intend to go long, and see potential resistance around the 2,150p area.
You can contact Michael and get your free copy of Ten Habits of Highly Profitable Traders from www.shiftingshares.com
Twitter: @shiftingshares
New subscribers to SharePad can claim a free month of data with the code: Michael
