Tuesday, December 13, 2011

The VALE Enigma

The Brazilian mining company Vale SA (VALE)  has been falling since last January, with the most recent legs down beginning in early September on the daily chart and early December on the hourly.

Among the charts I screened today, it has the most bearish feel to it. And on the chart, it is straightforward bearishness, with no ambiguity whatsoever.

Yet, it is far from being an awful company, with a 35% return on equity and a 0.36 debt/equity ratio. If the debt were a bit lower, it could almost be considered a growth stock.

There is a contradiction here. And it goes on.

Analysts aren't devastatingly down on the stock. In fact, its ratings suggest that it will perform in line with the market as a whole.

Its price hasn't been grossly punished in the marketplace. VALE's price is nearly double sales per share, with a 99% premium.

So this company is an enigma, with a huge mismatch between the fundamentals and the chart. Perhaps that helps explain why institutional ownership is only 15%.

Well, when in doubt, believe the chart. It is forward looking, distilling the hopes and fears of everyone who is trading VALE. The fundamentals, as always, look back to a static past.

In late July VALE reported some unhappy earnings and dropped in two weeks from more than $33 to around $24. Since then it has marched down in a calmer decline, bottoming at $21.14 on Oct. 4.

It bumped up to $26.68 in three uplegs separated by corrections, and has since dropped to today's low (so far) of $21.53 in two downlegs.

At the least, I would judge downside potential to be an additional 1.8%, down to the $21.14 level. But the price is in a classic downtrend, with clear lower highs and lower lows, and so $21.14 is not necessarily the end of the pattern.

The stock last traded at these levels in August 2009 on its way up to a recovery high early in 2011. Back then there was a four week area of congestion from $18.89 to $21.19 in August and also in late May/early June.

My opinion: That probably won't count as a support level. Bulls made money on the ensuing rise. Bears in the first area of congestion had a quick chance to redeem their decision on the next upleg. There's no reason that there would be a lot of money looking to get in at those levels.

Disclosure: I opened a bear postion in VALE today.

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