Last week, I posted a blog discussing the outlook for iron ore and RIO Tinto. Iron Ore is now breaking down below the double top support outllined in that post.

Spot prices in this commodity are a key driver not only for major resource stocks but also for the Aussie Dollar. They are also widely watched as a predictor of demand in the wider Chinese economy. It's not an easy chart to access publicly so I've posted an update for readers interested in following this situation.

Iron Ore - Daily

Iron Ore 62% Fines - Tianjin Port. Source: Bloomberg Iron Ore 62% Fines - Tianjin Port. Source: Bloomberg

The break below the red support line at around $145 completes the double top.

This creates the potential for a deeper correction. One possible target for this is around $131. At that level, the projection of the double top pattern height from its low coincides with the 61.8% retracement level of the last major swing up.

The 200 day moving average is not far below this cluster at around $127.

A break below support at $122.80 would start to make this look like more than a minor downward correction. Overlapping below that level could suggest either a correction of the whole move up from the $87 low or (more significantly) that the major downtrend is back underway with a move to new lows in prospect

Implications for other markets

A decline in spot iron ore prices has been widely anticipated.  Mining stocks have fallen in advance of this happening.  Markets appear to be taking the weaker iron ore price in their stride. The rally in the Aussie Dollar this week is an example.

Makets may not get seriously concerned unless spot iron ore overlaps below $120. This would start to place pressure on some of the more bullish long term forecasts and create potential for analysts to begin revising earnings forecasts for resource stocks. It's also important to remember that not all iron ore is sold on the spot market. There's still a lot sold under medium term contracts.

In the very short term, we've started to see a bit of a rally in copper and other commodities since yesterday. Even if iron ore follows suit it would now take a rally past the previous peak to suggest the downward correction has ended. It's more likely a rally from here would just be a short term bounce.