Upside For BHP?

This story features RIO TINTO LIMITED. For more info SHARE ANALYSIS: RIO

Bottom Line 6/11/12

EW Trend: Corrective
Price Trend: Down
Trend Strength: Weak

Technical Discussion

LAYMANS:

BHP Billiton ((BHP)) was posturing around the zone of resistance during our last review which pretty much continues to be the case. Slightly higher levels have been tagged though until we see buyers start to commit in numbers we have to be cognizant to the possibility that the sideways meander could continue over the coming weeks.  However, lacklustre price action accompanied by low volume would actually be a positive attribute and portend to the next leg being to the upside.  There’s no doubting the fact that Resource stocks in general have suffered over recent times with BHP & Rio Tinto ((RIO)) unable to dodge the weakness.  However, if the doubts surrounding China lift there is every chance that some upside momentum can be gleaned.  So we still believe that a significant low has been seen though of course that doesn’t necessarily mean that an aggressive movement higher is going to unfold.  Technical damage has been inflicted so it could well be that a little more time is needed before price gets on with the job and commences a longer term trend.  The one thing we do need to be aware of is that this company does tend to grind its way higher over the longer term as opposed to making strong clean trends.  This is just a trait of the stock (as it is with many heavyweights) and is therefore not reason for concern. 

TECHNICAL:

A rise of just over 16.0% has been seen from the July low though there’s no doubting that corrective wave structures have been dominating.  We’ve amended our short term count slightly which basically means moving intermediate degree wave-(a) to the recent pivot high which gives the pattern a little more clarity from a time perspective.  In fact waves-a and-c took almost an identical amount of time to conclude which is a common occurrence.  The recent top completes intermediate degree wave-(a) which in normal circumstances offers scope for a corrective structure down retracing between 50.0% – 61.8% of the prior leg.  However, with price just managing to edge above the new line of support it could be that more of a flat pattern evolves.  In other words price rotating sideways in this general region completing wave-(b) as a flat a little further down the track.  In fact if our wave count is correct then the current corrective phase should take at least 38.2% of the time taken by wave-(a) providing a target at the end of this month.  Remember, this is the minimum expectation and is not a high probability time projection.  The other pattern to look out for over the coming days is Type-A bearish divergence.  If the high made a couple of weeks ago is overcome by a small margin there is good chance that our oscillator will have made a lower high which will confirm the set-up.  It wouldn’t necessarily portend to significant weakness although once divergence triggers the previous pivot high is unlikely to be penetrated until the indicator unwinds into the oversold position. It’s also worth noting that the stock is looking overbought on the weekly chart (not shown) though this is less of an issue.

Trading Strategy

The ideal situation was to break up through $34.34 and for price to start trending higher though it seems a little more time is going to be required before a more sustainable move unfolds.  And from an Elliott perspective a decent retracement in terms of time hasn’t transpired meaning a consolidation is perfectly acceptable at this stage of proceedings.  If you like the company there is nothing wrong with continuing to accumulate partial positions on any small pull-back though ideally I’d prefer price not to break down through the line of support. If it does then the typical retracement zone is going to be the next port of call.  Not bearish in itself though of course we’ll have the added headwind of having to break back up through new resistance.
 

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