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--Clyde Russell is a Reuters market analyst. The views expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, Jan 11 It's no surprise that iron ore is the current commodity market darling, given record Chinese imports, a jump of 82 percent in prices in just four months and a huge storm about to hit a major mining region.
But behind these strong fundamentals is a technical picture showing the steel-making ingredient is heavily overbought and likely to decline in the next few months.
It's always tempting to dismiss technicals in the face of an opposing fundamental picture, but an analysis of the recent history of iron ore prices shows they have been accurate in reflecting turning points.
Asian spot iron ore .IO62-CNI=SI has retreated slightly from a 15-month high of $158.50 a tonne hit on Jan. 8 and closed on Thursday at $158.20, having rebounded from a three-year low of $86.70 hit last September.
This has been driven by robust Chinese imports, which climbed above 70 million tonnes for the first time in December, as steel mills restocked on the back of a brighter economic outlook for the world's largest commodity buyer.
The solid demand outlook comes as Cyclone Narelle bears down on Western Australia, home to the bulk of mines operated by world number two and three producers Rio Tinto and BHP Billiton.
While the category four storm, the second-strongest type, will help keep prices buoyant in the short term as the market frets about supply disruptions, this will only serve to make iron ore appear more technically vulnerable.
Iron ore swaps in Singapore normally trade in a mild backwardation and deviations from this generally herald a change in the direction of prices.
Currently the market is in steep backwardation, with the front-month contract commanding a substantial premium over those for later delivery.
By 11:10 a.m. in Singapore, the front-month contract was at $150.06 a tonne, 14 percent higher than the six-month contract and 19.5 percent above the 12-month.
This is a steeper backwardation than was in place just prior to iron ore's two previous sharp declines in price.
On Sept. 7, 2011, the front-month contract was 6 percent above the six-month and 14 percent higher than the 12-month. In the following seven weeks iron ore tumbled 35 percent.
A bigger decline of 42 percent was recorded in the five months from April 13 last year, when the front-month contract was 5 percent higher than the six-month and 10 percent above the 12-month.
The shape of the curve also helps point to rallies, showing this analysis is a good indicator of likely price movements. Just prior to the surge that started last September, the curve was in an extremely rare contango, where prices for future months were above those for immediate delivery.
The Relative Strength Indicator is also pointing to iron ore having rallied too hard in recent months.
It was 94.189 on Jan. 10, with a level above 70 indicating overbought conditions and a reading below 30 showing oversold.
In September 2011, the RSI peaked at 81.38 and in April last year it reached 84.3.
Both times it plunged to well below 30 after reaching the peaks, bottoming at just 1 in October 2011 and 3.95 in September last year.
The RSI has been above 90 on four occasions prior to the current occurrence since iron ore swaps started trading in 2008, and three of the four times has been followed by a drop to levels below 30, with an accompanying fall in prices.
What the forward curve and the RSI are showing is that the risks of a fall in iron ore prices is mounting, and while positive fundamentals may be able to stave this off for a while, the track record suggests technicals will win the day eventually. (Editing by Clarence Fernandez)