Chart of the Day: Is it time to buck the trend and do the big short on BHP?

A divergence represents a chart pattern or price action where an asset’s price moves in the opposite direction of an oscillator – in this case the RSI (relative strength).

A triple divergence, a more potent form of the above, occurs when the above occurs three times in a row, and is a more potent version of the phenomenon and thus have a greater chance to precede a more significant reversal – in this case a drop in price.

BHP (ASX:BHP) has been incredibly strong of late, and in so doing has been making new all time highs and knocking out a bunch of overbought signals (whilst still continuing higher mind you, as can happen).

As recently as the 21st of June, it was trading sub $46 and yet it is yours today for north of $53.

The last two weeks of price action has seen higher prices, whilst RSI has in each instance been dropping (see the three arrows on both of price and RSI on the below chart).

Shorting resource stocks has been tough graft this year overall.

To short a stock like BHP one is taking on the overarching trend, and the dogma of a market where almost all if not every natural holder is up on their position.

Yet this chart set up is difficult to resist for an attempt on lower prices, with plenty of gap fill targets below and a triple (quadruple?) divergence evident on the below.

We were recently short some BHP and were stopped out as the stock made an assault on $54.

With a tight stop at the likes of $55, it is a trade we will look at again.

Steve Collette of Collette Capital Pty Ltd (ABN 56645766507) is a Corporate Authorised Representative (No. 1284431) of Sanlam Private Wealth (AFS License No. 337927), which only provides general advice.

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