Can the mining services rally continue?
What the charts say about Monadelphous, WorleyParsons, NRW Holdings and Downer EDI.
Earlier this year as the negativity on the resources sector hit its heights, share prices hit their lows. Mining stocks have done well since the beginning of the year, with share prices moving higher. However, it is the mining services sector that has done even better.
This sector is arguably more leveraged to the prospects of the big miners, so trading the mining services stocks this year has been very profitable. Even after an impressive run, it is still worth having a look at the share price action for the bigger names.
Our philosophy to investing at Fairmont Equities is to ensure that both fundamentals (company information) and technicals (charting) are looking good.
Some of these companies may be well run, but their customers may be struggling. The miners are also price takers, not price makers. Decent growth in commodity prices could also be years away, which means share prices will remain volatile.
As a result, these stocks might be more suitable for investors who can appreciate a bit of risk, and are nimble and knowledgeable enough to trade back out when the run is over.
(Editor's note: Do not read the following ideas as stock recommendations. Do further research of your own or talk to a financial adviser before acting on themes in this article).
Here are four key mining services stocks:
Monadelphous had been the market darling of the sector. Not only did its share price increase more than fourfold from the GFC lows, but it was able to pay an attractive, fully franked dividend the whole time. This made it particularly attractive to Self-Managed Superannuation Funds.
The fall from grace has been fairly savage though, with the stock coming back to the GFC lows during 2015. However, during the last half of 2015 Monadelphous bottomed out and the downward momentum tailed off. This year the stock headed higher, breaking that three-year downtrend.
We are also seeing trend change signals triggered, even on a long-term basis such as this monthly chart.
On a shorter-term timeframe, Monadelphous had been forming an ascending triangle over the past few months. It cannot be seen clearly on this monthly chart, but last month we got a further buy signal as it broke through resistance near $8. Since then it has continued to push higher.
Based on current performance we would expect to see it trade up towards an initial target near $10. If it clears that, we have further resistance levels at $12 and $16.
However, a likely scenario is that Monadelphous trades up towards one of these first two levels and then spends more time being range bound as it builds a longer-term base.
WorleyParsons is heavily correlated to oil and we all know what has happened to the oil price. This monthly chart makes it easier to see the volume levels in the stock.
We can see a clear increase in volume as it gets to the low and then bounces off it (in early 2016). Firstly, this indicates potential accumulation down here as WorleyParsons was perhaps being viewed as finally oversold by the market.
In terms of our Relative Strength Index (RSI), it has shown up as being oversold. The stock is still in a downtrend though, so we need to be wary as to whether a good low is actually in place.
I can see some big resistance near the $8 region so until it clears that we need to be cautious on WorleyParsons.
3. NRW Holdings
NRW Holdings has suffered more than the larger mining services companies, and compared to its peak four years ago it has shed more than 90 per cent of its value. This means it would be hard to make big predictions on the long-term price targets, but on a shorter timeframe we can see some very interesting price action. This could lead to some trading opportunities.
On this chart we can see the shares bounce strongly off their lows. Within a week, the stock managed to increase its share price by more than three times. This was also on very strong volume.
Instead of being heavily sold into, you will notice that the share price essentially drifted sideways for a few months. This is a bullish sign, as the sellers are unable to push the price any lower.
In this situation, it is just a case of waiting for the break and following the momentum. We can now see that happening, so traders could look to pick up NWH and run with it until it reverses again.
4. Downer EDI
After the GFC, Downer hit a low in 2011 before mildly bouncing again. Earlier this year we saw Downer retest that low and bounce once again, which is a positive sign. The stock has been heading higher this year and we still see further upside for the next several months.
Looking at this weekly chart, we can see the formation of an inverse head and shoulders. This implies a low is in place for now and Downer should continue to move higher. With an inverse head and shoulders, we can extrapolate a target and we are looking as high as $5.
Like all sectors of the market, not all stocks are created equal. We can see more opportunity in some mining services stocks than in others, but the common theme is that this is a tough industry. Be clear about your strategy and understand the limitations.
About the author
Michael Gable is an investment adviser, helping his clients achieve higher returns from their share portfolios by combining both fundamental and technical analysis. He is a media commentator who regularly contributes to Sky News Business, the Australian Financial Review and online investing sites. Visit www.fairmontequities.com/research for a free trial of his weekly stock picks. Follow on Twitter: @GableMichael
Michael Gable is an investment adviser, helping his clients achieve higher returns from their share portfolios by combining both fundamental and technical analysis. He is a media commentator who regularly contributes to Sky News Business, the Australian Financial Review and online investing sites. Visit www.fairmontequities.com/research for a free trial of his weekly stock picks.
Follow on Twitter: @GableMichael
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