Chart of the week: Mining rally not over

BHP Billiton hits both of my targets, but is there more?

Suddenly, the mining giants, including BHP, are hot again. Yes, indeed, from zero last winter to hero today. In these pages, I have mapped the terrific rise in these shares from the lows in February when all mining shares were among the most hated on the planet, to my last coverage on 15 August.

So, today, I will update you with the glad tidings that my targets of £11 and £12 have been met - targets I laid out for you back in August. But, remember, my targets are just that - targets to be hit. They are not necessarily where markets make major turns - there may be other targets to aim for once the first ones have been met.

So why did the shares make a major turn up back in February when just about everyone was herding into the bears' camp?

For one thing, that amazing commodity - coal - made its low then and started a near-vertical rise - much to almost everyone's surprise. Here is the chart:

In fact, it has almost doubled in price! Remember, this is the most hated energy source on/in the planet. According to some, it is pure evil, as conventional "wisdom" has it that it is largely responsible for "global warming".

This is not the place to elaborate on this myth*, but it is a fact that most Western governments have slapped a very heavy tax on coal-fired power stations while showering immense subsidies on "green" energy sources such as wind and solar. Never mind that China and India have yet to see the light.

Yes, the accepted theme is that coal is on its way out, and prices must fall, no? And if you base your investment decisions on herding with the followers of received wisdom, you will have missed several terrific profitable opportunities. Here is the chart of the VanEck Vectors Coal ETF, which is a popular collection of coal-related company shares:

The shares have rocketed from a low of $5 in January to today's quote of $13 - a mammoth gain of 160%. And now the shares are rapidly approaching the 200-day moving average and we should see at least a pause in the ascent.

But the fact is that very few saw that coming - and highlights yet again how dangerous it can be to believe the obvious conclusions in the world of finance. As that famous trader Joe Granville once said: "When everyone believes something is obvious, it is obviously wrong".

And not only did coal take part in the "surprise" reversal in the commodity bear trend, here is iron ore - a commodity of which BHP is a very large producer and for which the sentiment had turned very bearish last winter.

Iron ore prices have rallied from the December low at $290 to today's $427 - a solid gain of almost 50%. That wasn't expected by very many last winter.

With sentiment towards most commodities at rock bottom last winter, BHP shares had been hit hard - and presented a massive buying opportunity, as I wrote at the time.

Here is the chart I showed back in August when the rally was in full spate:

From the Fibonacci levels I placed on the entire bear trend off the 2014 high, I reckoned a reasonable target was on or near the Fibonacci 38% level at around £12.

This is what I wrote in August:

If the market does make a turn down between now and the £11 target, that would be wave A. A decline from there would be wave B and then a resurgent market would put in the final C wave, which would likely exceed the A-wave high and possibly make it to my £12 target. That certainly would be a very pretty result.

Let's see if the market did make that A-B-C pattern and hit my £12 target. Here is the updated daily chart:

The answer is yes to both counts. The A-B-C pattern is pretty clear and my £12 target was hit a few days ago with an overshoot to the £12.80 high.

Not only that, but I have a nice "five up" in wave C which has likely not yet ended. In addition, it has hit my third tramline (T3) which is drawn equidistant from the main tramline pair. Always, T3 is a potential resistance level.

The bottom line? The market has hit several resistance levels and is due at least a pause in its ascent. But if the market can smash up past the £12 area resistance soon, I have another target at around the £14 level, which is the Fibonacci 50% retrace of the wave down off the 2014 high.

One final thought: I have labelled the recovery as a corrective A-B-C, but what if the market is really in a "five up" impulsive wave? If so, we are currently in a third wave - and third waves are usually long and strong. And that would set my targets much, much higher. Hmm.

*The views expressed here are those of the author and do not necessarily represent or reflect the views of Interactive Investor

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.