The big rally in iron ore has been a driving feature of the market in recent days. Spot iron ore has enjoyed its highest momentum and largest percentage rally for some time.

The momentum behind iron ore and related stocks looks like the kind of urgent activity often associated with quitting losing positions. In some cases like Fortescue, this might be actual short covering. In others it might simply be a matter of  correcting underweight positions in major mining stocks

It was only a few weeks ago that the consensus view seemed to be that spot iron ore faced a significant probability of continuing its slide towards $40 or beyond. The latest rally seems to reflect some change of heart

The key question for markets is now going to be whether this rally reflects a view that iron ore might base in the $45-60 range but with some ongoing probability of a move to lower levels as demand growth fails to soak up increased production by the majors. OR are we witnessing typical market predictive behaviour where the smart money is starting to foresee improved world growth and a future in which the forecast supply overhang fails to materialise

Time will tell but resistance in the BHP chart, suggests we might be about to pause and ponder this question for a  while. If this resistance holds, it will mean that Australia 200 index will also struggle to get convincingly clear of the 6000 resistance for a while yet

BHP chart

By yesterday's close, BHP had rallied 7.5% over the past 3 days. Here are my thoughts on this chart

  • The latest rally saw BHP gap higher each morning. These "continuation gaps" are characteristic of urgent rallies and ongoing up trends. The early February rally circled across to the left of the chart showed the same behaviour
  • With the exception of Friday, turnover in BHP has been relatively light suggesting buyers have been finding it hard to get set.
  • BHP has now rallied to the potential resistance of its 200 day moving average. As you can see this did a neat job of stopping the last rally back in early March
  • Also at this level is the 78.6% Fibonacci resistance of the last decline. This could add weight to the 200 day ma resistance. On the other hand a move clear of the 78.6% retracement would suggest that this latest rally is part of a larger move higher and not just a retracement.
  • It's not usually good trading strategy to stand in front of a freight train like the latest rally in BHP. However, the odds of selling at this resistance would improve if BHP starts to show more signs of rejecting this resistance, especially if it confirms a trend peak around this level
  • Prior to yesterday, the 3 previous candles were green with short upper wicks indicating that the market had  closed above its open and near the high of the day
  • This behavior changed yesterday when the market closed near its opening level and well below the high of the day, suggesting a bit of indecision that could yet give us a trend peak at this resistance before too long

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