The current rally is probably getting a little long in the tooth, thus a pullback may be in the works. After all, the S&P has rallied almost 125 points in a week without any substantial pullback. Thanks to that rally though, a lot of stocks have broken back above previous levels. This should be a sign of higher prices for those stocks, even if those moves are only temporary. One stock that has broken back above resistance and that has multiple levels to trade off of is that of BHP Billiton Plc.
BHP Billiton plc is a diversified natural resources company. The company operates nine customer sector groups: petroleum, aluminium, base metals (including uranium), diamonds and specialty products, stainless steel materials, iron ore, manganese, metallurgical coal and energy coal. During the most recent fiscal year, the BHP realized an annual production volume of 158.56 million barrels of oil equivalent. During fiscal 2010, the company produced 1.2 million tonnes of aluminium. It also produced 13.9 million tonnes of bauxite and 3.8 million tonnes of alumina.
Before discussing a potential trading opportunity with BBL (BHP Billiton Plc.), please review the 1 yr. chart of BBL that I have outlined below, with my added notations:
BBL simply gravitates to the increments of $10. Prior to the August breakdown, BBL had a clear level at $80 (purple) and another at $70 (teal). After breaking below the $70, BBL found support for a month or so at $60 and then broke down to the $50 level of support. However, yesterday the stock broke back above the previous level of $60 and should be moving higher from here.
The Tale of the Tape: BBL has important price levels at each increment of $10 and has broken back above one of those increments at $60. Since the market rally is getting a little old, a pullback could bring BBL back down to that $60 level. This would provide an excellent opportunity for a long position at $60, in expectation of a possible run to $70, with a stop placed below that level. If BBL cannot hold $60, a short position could be entered with an expected drop back down to the $50 level.
Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.
No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade. Capital preservation is always key!
Christian Tharp, CMT