Short-term sell signals for BHP

This post formed the basis of an article which then appeared in the Australian Financial Review on 25 April 2016. Michael Gable is a regular expert contributor to the AFR. You can access the AFR version HERE

Much has been said about BHP, iron ore, and the resources sector in general.

We know that the commodities boom is over, but has the sell-off in stock prices been overdone?

We can analyse the company along with the supply and demand for commodities forever and a day but a multitude of assumptions will always make BHP impossible to value.

Trying to pick a low in the share price using these methods has therefore been difficult for investors. A better way to determine the direction of the BHP share price is to understand where the market is trying to push it at each point in time, and then going along for the ride.

We have noticed some interesting charting patterns on BHP this year which have provided us insights into the share price direction.

On a weekly chart, BHP became oversold earlier this year as measured by the Relative Strength Index (RSI).

The last time we saw this buy signal was a year ago when the stock then turned around and rallied over $6 (circled on the chart).

When we look at a monthly chart instead, it is the first time we received this buy signal in over 20 years of data. We have also seen some solid weekly and monthly gains on the candlestick charts.

This shows us that despite the occasional dip, the buying is looking very strong for BHP when it is under $20. Picking these buy signals has seen BHP rally nearly 40 per cent during the last few months.

This buying strength leads me to believe that a decent low is in place for BHP – possibly the low for the year. In the short term however we are currently getting some sell signals. Our charting research earlier this year predicted a run up towards $22 from the sub $15 level.

Having nearly reached that last week, BHP gave a sell signal on the shorter term daily RSI. As a result, we believe that BHP will cool off for the time being and head back towards $18.

That low in January should hold for now but these recent signals are telling us to expect lower levels in the short term.

Understanding these charting patterns is not just useful for those looking to trade BHP. If you are a longer term investor who is trying to manage a BHP position, it can be useful to know that it is likely to have found a low.

Once BHP finds support back near $18, we anticipate another movement up towards the major resistance level near $24. We have used this recent sell signal to hedge our BHP positions with the use of a covered call option. That hedging should then be closed off as BHP hits our lower support targets.

BHP 26 April 2016


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