Chart of the week: a FTSE 100 share on verge of major rally phase?

After a volatile year so far, this company could be about to do something exciting, believes analyst John Burford who sees great upside potential.

Is Fresnillo about to break higher?

I am returning to FTSE 100 silver miner Fresnillo (LSE:FRES) now because it appears to be on the verge of a major rally phase, awakening from a deep slumber. 

There is little doubt that the precious metals, including silver, have been in the doldrums in recent weeks. To many, this is extremely puzzling since it is commonly thought that in a period of high inflation, such as that we are experiencing, these commodities perform extremely well.

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In fact, if you examine the historical record over decades, you will find that sometimes they do and sometimes they don't. Obviously, there are factors at work other than the headline inflation rate. Note: I am using the common CPI data as a proxy for inflation (which is in reality a measure of the changes in money and credit supply).

Another myth surrounding the precious metals is that high interest rates dampen the attractions of holding them with their higher carrying costs. Again, the record shows that sometimes that holds true and sometimes it does not.

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One glaring other factor at play today is, of course, the strong dollar. Measured in currencies other than the US dollar, the precious metals have performed well.

But last week, the US dollar and the precious metals reacted very strongly to Friday's US non-farm jobs data that showed a continued hot labour market. In fact, the reaction was perverse in that the implied strong US economy would normally indicate no Federal Reserve 'pivot' soon, with interest rates zooming higher, dragging the dollar up in its wake. So much for the near-universal theory that the news makes the market (it follows it!).

Past performance is not a guide to future performance.

This is the weekly chart going back to 2016 with my excellent tramlines drawn. On this scale, the strong 8% share price surge on Friday can hardly be seen – but it did take it to the upper line of my smaller tramline pair. Thus, only a smaller nudge soon would very likely send it up towards my first target around the £10 mark.

Past performance is not a guide to future performance.

Here is the weekly silver chart that shows the market has been testing the major long-term support at the Fibonacci 50% retrace and, with Friday's surge, is approaching a test of the major resistance slightly above the current $21.

A successful break of that resistance would likely send it up to my target around $26, with Fresnillo shares advancing in tandem upwards to my first target around £10.

As interest rates have risen dramatically in recent weeks from near zero to over a 4% yield on three-month Treasury bills this year, the precious metals have actually held their ground quite well, especially since the summer. That tells me there has been a large distribution into safer hands (the 'smart' money).

I view the downside in Fresnillo as limited, while the upside has great potential. Only a move below the £6 level would send me back to my drawing board.

John Burford is a freelance contributor and not a direct employee of interactive investor.