In the last half of 2018, we were confident that BHP Limited (ASX:BHP) would head towards $40. Now that it has achieved our target, can it continue to head higher?
The chart for BHP
Our premise for the $40 was based on BHP forming a very powerful charting set-up. During 2018, as BHP trading in the low $30’s, I noticed that it was holding in well under the key $35 level. This level was important because BHP had tried on a few occasions in the past to push through it. During 2013 -2014, BHP had a few attempts to push through it, but it was unsuccessful. What was interesting this time is that BHP was able to test that $35 level without being sold off aggressively.
When a share price can congest under an old high, it is a very powerful sign. It is one of my favourite charting set-ups. What it means is that investors selling under the old high are met by buyers. By not getting sold off sharply, it means that there is a lot of buying pressure to meet any selling. Once that selling pressure has eased, the stock pushes to a new high and it is then capable of going for a strong run. This is why we had been telling our clients, investors, and anyone watching us in the media for a while now that BHP was getting ready for a big move.
We were expecting a push beyond the $35 region to be the proof that the sellers have exhausted themselves and this would set BHP up to rally higher. Often the 4th attempt to push through resistance is successful.
The new target for BHP
I claimed $40 as a target, being a round number that it could gravitate towards. But when we look at the long-term chart for BHP, you will notice that its prior peaks occurred near $45. (Note, if your charting software is showing levels closer to $38 and $50 instead of $35 and $45, it is because your software hasn’t taken into account corporate actions such as the de-merger of S32).
After a possible period of shorter-term consolidation, I believe that BHP now has $45 in its sights. This is because the old $35 level was a such a strong, multi-year level for BHP. This means that a break of that $35 region takes on much more significance than any other resistance level. Because we are now free of that more than 7-year trading range, there is now a greater chance of money flowing into BHP at these levels. We are likely to now witness a “fear of missing out”.
What about the BHP fundamentals?
A lot of our commentary on BHP has revolved around the charts. At Fairmont Equities, we combine technical analysis with fundamentals. We have also been positive on BHP’s fundamentals, which is why we have been so bullish on it.
Positive Fundamentals + Positive Technicals = A great investment
BHP has a favourable commodities mix, and rising commodity prices is giving it a license to print money. The macro backdrop is quite strong for commodity stocks. For our trading clients (investors who get our help in managing their portfolios) have been overweight commodity stocks for a while now.
The macro environment is supportive of commodity stocks for the following reasons:
- Share markets in late cycle tend to favour resources
- China is introducing measures to support their economy
- Lower interest rates are good for share markets
- A soft US dollar is good for commodities
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Do we sell BHP at $45?
Just because BHP has reached our target of $40, it doesn’t make it a sell. Just as a move to $45 won’t make it a sell either. The way we are managing BHP for our clients is to run a trailing stop behind it. While its going up, it is often best to stick with that momentum. It therefore becomes a “sell” when the uptrend eventually ends.
Michael Gable is managing director of Fairmont Equities.
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