Chief Editor

BHP is very much a favourite of mine – I had 10 wonderful years with the company, mainly in international trading. From that association I developed a soft spot for the stock believing at the time, that it had earned its position as one of Australia’s great corporate icons. And when I first started investing I would ride out the roller coaster markets holding on tightly to BHP until I eventually realised that it was not in my best interest – no place for emotions or attachments to a stock – this is strictly business and you do what is only right for your “pocket”.

I have been in and out of the stock many times over the years and last sold a short-term trade in BHP February this year as I saw on-going weakness.

If one looks for the fundamentals – which I don’t, as I am strictly a technical trader – then such factors as a change of management, the effect on future earnings of a stronger South African Rand and Australian Dollar, uncertainty about world economic outlook and its impact on demand for commodities will certainly maintain downward pressure on the stock for some time. The steel division, long regarded as an under performing sector was spun off as BSL in July last year but ironically has out shone BHP since, although it has by no means been a stellar performer

Chart #1 BHP Weekly

The weekly chart above for BHP shows the stock has been in steady decline since March 2002, with numerous opportunities to trade the peaks and troughs. There have also been plenty of opportunities to exit the stock in an orderly manner.

Your technical analysis does not have to be highly mathematical to exit such stocks. One can become adept at just looking at a simple chart to see the movement of price and volume. In this chart I have used a simple standard deviation channel to identify a break in trend. You could also have used a simple trend line, i.e., the bottom line of the channel as shown above to identify an exit.

Where to for BHP from here?

When you have ridden the big dipper with a stock what do you do? If you are still in BHP (or AMP!) then this is the toughest time to make an exit decision.

The issues are:

  • Can it fall much further? The answer to that question is yes.
  • How far can it fall? It is probably likely to fall below $8 but in a worst-case scenario this could be below $7.50 before it finds a base.
  • What are the odds? This is somewhat linked to the Australian Dollar. The dollar could go beyond the $0.70 but this is very unlikely to happen before we see a major retracement to say $0.61.
  • What is the likely timing? This whole process could take several months thus you could be foregoing better investment opportunities elsewhere.

One of the problems with a stock that is experiencing range trading, such as BHP, is that it becomes range “bound” and it can be very difficult for the stock to break out in the medium term. You could take advantage of this pattern and use range trading indicators such as stochastic and RSI to “buy low sell high”, using crossovers to enter and exit – refer to stochastic crossover on BHP chart above

In my view trading sideway moving stocks can be a frenetic and time consuming process. I find it is much easier to trade stocks that have a chart picture that is easy to understand such as a long-term upward trend.

Not so easy to find however! But this is the time in the stock market cycle when you are more likely to find them. Obviously a long trending stock won’t be so evident now. You find them by getting on board when the stock has turned the corner. I am constantly trawling for such stocks. In the last week I have identified some that show prospects of developing medium to long term upward trends: ARL, BIL, DOW, ION, PRG and TOL. No doubt there are more but these caught my eye using the entry criteria described in Issue #3.

I would expect that maybe only one or two of these would ultimately give me a long-term trend. One or two I will throw back within a couple of weeks and maybe others within a few months but I am happy with a few per cent for short term trades. If any fall then I will quit them quickly and certainly will not let them run in to a loss greater than 10% and will probably quit after say a fall of 5%. I will talk more about exiting and risk management in a later issue.

In the meantime successful investing.

Tom Scollon
Chief Editor