Vale SA (ADR): Buy the Deep Pullback in VALE Stock

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There’s always the possibility headlines could get worse before they get better for Brazilian miner Vale SA (ADR) (VALE). But for VALE shareholders and other traders, this might be a good thing.

vale stock

They tell us investors hate uncertainty. It’s a popular and heavily used sound bite used by Wall Street when the news is bad and a stock like iron play VALE is reacting poorly.

At the moment, with headline risks such as Brazil’s political regime in disrepair, iron ore prices cratering late last week, China stockpiles and VALE stock falling about 10% Monday and a rough-and-tumble 35% since late April … well, there’s an air of credibility to this nugget of wisdom.

But don’t forget Wall Street is guilty of contradictory behavior in a stock like VALE.

A second expression piquing our interest right now is the possibility for VALE to “climb a wall of worry” and move up in price despite ominous headline risks and uncertainties.

Investors only need look back to early February into March get a sense of this type of market behavior — namely, the equally powerful price action in VALE stock when doom and gloom headlines were everywhere.

Will the coming days, weeks and months provide a return of the former environment for shareholders of VALE? Only time will provide us with a definitive answer. But for now, VALE is looking very interesting as a contrarian play.

A Look at the Chart

050916-vale-stock-chart_001
Click to Enlarge
Source: Charts by TradingView

Looking at the daily chart of Vale, we can see shares broke cleanly above a long-standing downtrend line of the past five years as part of its massive rally earlier this year.

Now, following corrective price action from its April highs, VALE stock could be forming a higher low backed by a recent golden and 50% Fibonacci retracement level.

Should VALE trade above $4.50 and lend candle confirmation that a low is in place, a bullish uptrend looks much more likely, and an opportunity looks much clearer.

Long Calls on VALE Stock

Given our expectations, the VALE Sep $5 call is attractive right now. With Vale shares trading around $4.30 and with the call priced at 47 cents, we estimate it can fetch around 55 to 60 cents if the trader waits for a reversal confirmation through $4.50.

This is based on starting directional risk of 45, a price move of 20 cents in VALE stock and slight fudging of lesser Greeks.

Upon buying this contract, the bullish trader has an intermediate-term position that has roughly one-ninth the risk of holding an equivalent amount of VALE stock. That’s nice.

On the upside, if VALE rallies to retest the recent high of $6.26, the trader stands to gain at least 120% based on intrinsic value. That type of profit would be even nicer, of course.

And should bulls find VALE stock’s former bear market low from 2009 of $8.80 too cheap to ignore in the coming months? While the context is different, we can’t help but be reminded of another famous Wall Street adage:

“Price is what you pay, value is what you get.”

Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.

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The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.


Article printed from InvestorPlace Media, https://investorplace.com/2016/05/vale-stock-buy-deep-pullback/.

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