When I last looked at RIO on 20 August, it was trading at $54.90 and I noted the island reversals (marked 1 and 2). My comment was “
By shorting it here around $54.90, we place a stop at $57.20, and it should go to a new low under $50.20. Based on those figures its a 2:1 return, but the stock will most likely extend to the $48 area, making it closer to a 3:1 risk reward ratio.” It promptly dropped to $48.37 before rallying again.
We can see on the chart that the recent rally has been on decreasing volume. After gapping down yesterday on slightly higher volume, it has formed another island reversal (marked 3). As a result, the most probable scenario is another fall in the share price. A price of the same magnitude should see RIO head towards $50. Otherwise there is still the possibility of it finding a new low closer to $48 again. For this island reversal to hold true, RIO cannot fill the gap up to $56.26.
