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'Walloped' Rio Stock Gave Hint of Super Tax: Charts

Walloped is a good old Australian word which defines a cowardly attack or beating. Originally it applied to a beating at the hands of the police, or ‘wallopers’ who were recruited from the ranks of ex-convicts during the 1850’s gold rushes. Their favorite targets were the small gold miners on Victorian gold fields.

The term has been given new currency, but with the same original meaning Sunday, when Australia's Prime Minister Kevin Rudd unveiled a 40 percent resource “super profits” tax that would take effect in 2012 and would give the country one of the highest mining tax rates in the world. This reflects the Australian tradition of persistent persecution of success and gives new meaning to the term ‘sovereign risk’ because the terms of business have been so radically altered by Government decision.

There are three questions of particular interest. First, did investors see this coming and is it shown in the price charts? Second, what are the immediate downside targets for any price retreat. Third, what are the chart conditions which suggest the immediate reaction is an over-reaction?

We use Rio Tinto Australia as a proxy for large Australian miners.

Investors clearly did see this coming, even though the leak to the Australian media occurred only a few days before the release of the report. The evidence of this apprehension is the four weeks of price retreat shown on the weekly chart. In particular the rapid retreat from $78.00 to $72.00 suggests growing concern in the market. The gap down from $72.00 to $70.00 captures the impact of the official release of the report.

But the most important feature on the chart is the move below the long term uptrend line that has been in place since December 2008. This is the first time this line has been broken and it has been broken decisively. The same pattern of behavior is repeated on the BHP price chart. The move below the trend line suggests a more significant change in the trend and a move towards lower support targets.

There are two immediate downside support targets. The first is near $66.00 and captures the rebound points in the February lows. These are not lows created by the Stern Hu case. The same February lows provide the upper era of support for BHP. Below this is support for Rio near $61.00. This is a long term resistance area that capped rises in 2009. It is also a resistance area in 2006 and 2007. The strength of this resistance area suggests this is also a strong support area. Traders will look for a rebound from this area. Short side traders will look to cover shorts in this region.

Investors expected a walloping but this does not prevent an overreaction. A continued fall which carries the weekly close below $66.00 indicates a severe overreaction. This has the potential to develop into a prolonged downtrend, potentially based on a head and shoulder pattern. A fall below $61.00 has a downside target near $52.00.

A rebound from near $66.00 shows the overreaction has been contained. It still impacts the nature of the long term upturned, but it shows a continuation of the upturned with different characteristics. In this situation the long term upturned line acts as a resistance level. The viability of the upturned rebound is shown when price is able to move above $82.00.

An attack by the gold fields police was part of the risk of mining in the 1850’s. An attack on mining profits is part of the risk of mining in 2010. The chart behavior suggests this attack will be absorbed and that the longer term opportunities still remain associated with a rising trend.

The Australian mining industry has been 'walloped', but its not an attack that has been entirely unexpected. Additionally the change in taxation is not due to take effect until 2012. There is one election before the implementation date rolls around. There is no guarantee the new tax will be imposed, or imposed at the rate currently set. This, and the charts, suggests there remain good rebound trading opportunities prior to the establishment of a new longer term trend.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.

If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.

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  • Daryl Guppy is an independent technical analyst who appears frequently on CNBC Asia.

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