Rio Tinto PLC is one of the world’s leading providers of commodities such as aluminium, iron or copper. It is traded on the London Stock Exchange and the Australian Securities Exchange, and in the moment of writing this article is about to surpass its historic top. Now, the price is 4897, while the historic tops stands at 4979.
For many investors, buying something in its historic maximum may be counterintuitive. However, there are also some reasons to think about it.
The theory says that when a stock breaks a sideways movement, you can expect the movement to be equivalent to the difference between the resistance and the support that conformed the sideways.
In the case of Rio Tinto PLC, this theory was perfect for the Covid-19 crash. Rio Tinto’s sideways was between about 4500 and 3700, which makes a difference of 800. If we subtract 800 from 3700, we get 2900; and if we look at the minimum of the Covid-19 crash, it was 2950. Although past behaviours do not assure future ones, it is always nice to know that the stock “follows the rules.”
Now, Rio Tinto PLC is about to break the 4979 top; and if we follow the mentioned theory, we could expect it to increase in the same amount than the difference between the tops and the Covid-19 crash’s minimum. Let’s round the numbers: 4900 – 3000 = a 1900 difference. Now, we add the difference to the top: 4900 + 1900 = 6800 as a goal price. If this becomes true, it would mean a profit of about 38 percent.
Now, let’s be clear. In order for this to even be a theory that could be correct or wrong, we need it to confirm the top surpass which has not happened yet and may not happen.
If it happens though, it is a good idea to keep an eye on the stock. Keep in mind that when a stock breaks a top, it usually breaks for a while and then makes a correction that goes slightly under the previous top, and then it continues the rise. That level is perfect for our stop loss. The problem here is how to decide how much is slightly.
There are two options:
- We could set a stop loss at 4100, which is a potential loss of slightly more than 5 percent.
- We could set the stop at 3900 where there is a gap, but that means a potential loss of more than 20 percent, which is significant.
Since a 20 percent loss is too much for us, we would go for the 4100 level knowing that the stop loss could get activated and then the stock could rise again.
Remember that this is not investing advice and that our analysis can be wrong or lacking information. If you need advice, please ask your financial advisor.