A solid mining sector rally has paused for breath

Glencore shares are consolidating after a strong start to 2016. Where will they head next? While Chinese economic growth and the strength of the US Dollar have surely been the major drivers for the mining sector as a whole, it’s things like deleveraging and divesting that are telling  us just which stocks within the sector might out- or under-perform.

In March we saw Glencore’s blue chip peer Anglo American announce it would reduce its portfolio of offerings from 9 products to just 3 – Gold, Diamonds and Copper. That’s all well and good, but it also means that Anglo American must sell those things it no longer wants. Of course they happen to be the things that virtually no one wants!

Deleveraging or repositioning?

Deleveraging  in the mining sector continues in April with Glencore finding a buyer for a 40% stake in its agricultural business in the Canada Pension Plan Investment Board (CPPIB). No such luck as yet for Anglo American. The fact that Glencore has actually found a buyer for its wares should boost bullish sentiment, but a look at the details throws up something interesting: Glencore is actually intending to use the money from the sale to expand its agricultural business!

So the company is looking to re-position with this particular move. It’s not a deleveraging move as such, and may even be seen as taking an unnecessary risk. Should Glencore and the other miners be sitting tight right now, rather than aggressively trying to trade their way out of the commodity downturn?

Overall though, it’s known that Glencore is on track to meet its debt reduction targets, so this could equally be a sign that the confident miner and commodity trader is looking onwards and upwards.

Will this be a boon for the bulls or the bears?

GLEN; 4-yr, weekly

GLEN; 9-month, daily

Technical analysis

Both the long term and short term chart show recent weakness in Glencore shares. This intensified a little following the announcement of the sale on 6 April, suggesting that investors had seen the announcement for what it was – mere repositioning rather than full on divestment. Share price weakness could also be due to profit taking after such a strong start to 2016 and amid resurfacing concerns about global growth.

There’s still potential for this to be consolidation ahead of another leg up though. The outlook for US monetary policy seems likely to remain dovish, despite the odd dissenting Fed official, such that the USD should continue to weaken in the short term. This gives buoyancy to commodity prices.

Shares in Glencore are currently 120% up from the lows of sept 2015 and a further 55% upside would see them return to their 12-month highs. Shorter term support lies at 130p and the 50-day moving average slightly below. A break down below both of these would be a bearish signal and could see Glencore shares head back towards 100p. Bulls will look for a bounce and return to at least 171p before placing their bets.

Will shares in Glencore (GLEN) break back up towards the highs of 320p, or pull back towards the lows of 66p?