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BHP – A Follow-up
Welcome to all our Safety in the Market traders to this month’s newsletter and of course Happy New Year. You may recall that in my last article I wrote about BHP and the possibility of some higher prices to come. The stock has drifted higher but has encountered some ‘Resistance’ around the $32.00 mark which has stifled any significant rise in price.
Now just to be sure we are all on the same page a quick recap of the basics. A Resistance Level is one whereby the selling pressure is high enough to stop or reverse an up-trend. We represent resistance with a horizontal line on our charts. Initially one can look to go short off a resistance level, however if broken then one can expect higher prices to come. Chart 1 shows the recent market action on the daily bar chart for BHP. I have applied a one-day swing overlay to chart for as we know, swing charts are an excellent way to highlight (or identify) a resistance (or support) level.
Chart 1
click chart to enlarge
I have labelled each of the tops that I believe help clearly identify the resistance level in question. You could argue there are even more, but for now let’s say we have the following dates and prices:
- 14 October 2008 - $32.09
- 5 November 2008 - $31.61
- 28 November 2008 - $31.05
- 11 December 2008 - $31.66
- 17 December 2008 - $31.95
On 6 and 7 January this year BHP price penetrated the line I have used to represent the approximate level of resistance. The most interest is placed on 7 January, when it managed to close above the line for the first time, keeping in mind the close is the most important price of any day.
Now the tops that define our resistance level span a period of over 2 months and hence make the trading of a break-out an opportunity that should be treated with a degree of caution. 7 January goes to prove that for now, as prices fell dramatically the next day back underneath the resistance level. This is where one of David’s old chestnuts comes into play, the ‘close filter’. With more than a month separating our equal highs it is prudent to bring in this so called ‘close filter’ to eliminate being caught it what is known as a ‘false break’. Firstly, a ‘false break’ is when prices temporarily break through resistance (or support) and then fails to follow through, perhaps indicating only technical buying on the day of the break. The ‘close filter’ requires that the market close for a number of consecutive days above the resistance level before it is considered a genuine breakout. In this case a 3-day close filter would be required as we have over 2 months separating our highs.
So should BHP close for 3 consecutive days above the resistance line indicated, then higher prices would be expected in the near term. I have also noted on Chart 1 a small but important gap down made following the close of $32.24 on September 2008. Let’s perhaps say a more conservative view would be 3 closes above $32.24 and then we are satisfied we have a genuine break.
For now, 7 January is a false break and indicates to be cautious on the long side and even perhaps look at short trading opportunities. With my view on the overall index as still bullish I’m looking at BHP re-testing this resistance level in the coming weeks. If it does break though, we also now the other old chestnut, old tops can become new bottoms.
Until next time...
Noel Campbell
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