Chart of the week: A FTSE 100 share for your buy list?

Recovering from a sharp sell-off, our chartist has spotted something striking about this trade set-up. 

Fresnillo is on many buy lists.  Should it be on yours?

All of a sudden, mainstream media share tipsters have just woken up to the precious metals miners.  Recall, they had previously been shunned by the herd as the real action was in tech, especially the FAANGS.  

But with tech stocks currently in a wobble, the MSM pundits have looked elsewhere and noted that gold and silver have been in strong bull markets for a few months. The result?  They have been falling over themselves in recent days to extol the virtues of owning them.

Sadly, most of the analysts are very late to this party, as is customary. One of the vehicles they have been including is the FTSE 100 silver miner Fresnillo (LSE:FRES) – with operations in Mexico - which is the share I wish to cover here.

Here is the silver price chart this year:

Source: interactive investor  Past performance is not a guide to future performance

Until June, the market was in a steady decline but then caught a bid and has been on the up elevator ever since with a stunning gain of around 30% in three months.

If you believe that share prices of silver miners advance as silver does – and vice versa, then examine closely this chart of Fresnillo over the same time period:

Source: interactive investor  Past performance is not a guide to future performance

From the start of the year, while silver was in retreat, Fresnillo advanced pretty handily by about 25% from 800p to 1,000p. Hmmm.

Better yet, as silver was starting its bull run mid-year, the shares were topping out and plunged by 30% in mere days (red arrow) from 900p to 600p as silver advanced by 6%!

And the share recovery off that low has been mild while silver has advanced by a cool 15%.  With silver at a new high at $18.50, surely the shares should be much higher?

In fact, most of these prominent movements have been completely contrary to the thesis that the shares and silver metal move together.  They often go separate ways! So, shall we abandon that concept and posit that the Fresnillo share price bears little or no relationship to the price of silver?  It certainly appears so on this evidence.

Of course, silver is priced in dollars while Fresnillo being based in London, reports earnings in sterling, so there is some currency conversion component (it has been favourable recently as the pound has slumped).  In addition, a miner just doesn't dig up bullion ready for market!  

There are hazards galore in extracting the ore, smelting it and processing it.  So trading the shares is not like trading the metal.  But the divergences between the charts is striking.

I believe gold and silver are close to major highs – contrary to the vast majority of pundits who are so confident of their allure that bullish sentiment towards both exceeds the 90% level – an extreme reading.

Going back to the Fresnillo chart:

Source: interactive investor  Past performance is not a guide to future performance

The shares have retraced a Fibonacci 50% of the most recent decline and could turn down from here.  But a slightly better target is the 785p area at the Fibonacci 62% for a turn.  Only a surge above the 900p would amend my stance.

For more information about Tramline Traders, or to take a three-week free trial, go to  www.tramlinetraders.com. 

John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.