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What the charts say about the resource sector

Photo of Robert Brain By Robert Brain

min read

Some charting techniques provide clues to long-term cycles and price direction.

Is now the right time to buy resource stocks, is the mining and resources slump coming to an end, and are there useful clues in the long-term commodity price cycles? Analysing the correct charts can provide some useful insights.

Many investors tend to look for an investment that is likely to outperform in the long term; many others look for outperformance in the near term. I say the near term because we have seen in recent years that we can no longer achieve the best portfolio performance using a long-term buy-and-hold strategy.

There needs to be some amount of portfolio performance monitoring and fine tuning at least from year to year, and this cannot be done with the set-and-forget, buy-and-hold approach.

Even though we might not be investing with the long term in mind, it is useful to study long-term price charts. There are a couple of key considerations.

First, a monthly or quarterly chart might look less busy than a daily one over a multi-year period, but remember there is a lot of price action missing from these charts. A monthly chart can summarise the key price action over many years, but only shows the last traded price for each calendar month and there is no indication of any higher or lower prices during the month.

Sometimes it is best to have the extra noise on the chart, to be able to see the weekly or daily peaks and troughs.

Second, a long-term chart that covers a wide range in share prices is often best viewed using a logarithmic price scale on the vertical axis. Note the two price charts in the accompanying diagram. They are both weekly charts of BHP Billiton over almost 30 years from 1986 to mid-September 2015.

The left-hand chart uses a normal linear price scale. We can see the price appears fairly low and flat across the first half of the chart until mid-2003, after which the shares seem to have rallied strongly. The right-hand chart is exactly the same except that the vertical price axis uses a logarithmic scale, making this a semi-log price chart.

BHP Billiton (weekly semi-log chart, 1986-2015)
(LH: linear scale on price axis. RH: log scale on price axis)

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Larger chart and more details are available at Brainy’s Share Market Toolbox www.robertbrain.com

The log scale for the price axis in the right-hand chart has two benefits. First, we can see more of the detail of the price action in the first half of the chart. We can also readily see that the height of the trend channel across the first half of the chart is about 50 per cent of the price action; in percentage terms it is actually the same as the height of the trading range from 2008 to 2015. When measured, it is readily apparent that the change in price is the same percentage amount, because it is a log price scale.

Price cycle duration

Can we use long-term price cycles to influence investment decisions? It can be argued that a long-term view of the economic cycle, or of the share prices of individual stocks or their sectors, is so “big picture” that it is purely an academic exercise that many people enjoy doing.

This is somewhat apparent in the price chart of BHP above. One could argue that to study prices of stocks or commodities going back decades is not very helpful for the month-to-month or week-to-week investor.

Economists and large fund managers might do this sort of analysis as a best-guess as to where to park their clients’ funds. In reality, retail investors can be better off focusing on the shorter to medium term. But it is useful to be aware of the bigger-picture cycles that are under way, to help make better-quality investment decisions.

When to buy resources stocks

Many investors perform a periodic analysis of their portfolio and make appropriate adjustments. This might be because of the economic cycle and a desire to avoid potential hits to the economy as some sectors slow down. Or it might be to take advantage of other sectors that are about to see economic cycle upside.

One of the challenges is to be able to accurately identify the current stage of the economic cycle so as to accurately time a stock purchase.

Many investors might currently hold the view that materials and energy stocks have been hurting for long enough and that the next cyclical upswing is due any time soon. We might be looking at materials stocks (miners such as BHP Billiton, Rio Tinto and Fortescue) or energy stocks (Woodside, Santos and Caltex). But is now the time to buy?

The astute technical analyst (or chartist) will not buy a stock with a falling share price (a downtrending price) because Dow Theory says a trend is a trend and it is likely to continue until it is confirmed to have finished. For a technical analysis study of a resource stock price chart, see the diagram below — a weekly price chart of Woodside over a recent 18-month period.

(Editor's note: Do not read the following ideas as stock recommendations. Do further research of your own or talk to a licensed financial adviser before acting on themes in this article).


Woodside Petroleum and Momentum indicator (weekly chart, 2014-2015)

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In this price chart, note that Woodside’s share price (thick black line in upper half) peaked in August 2014, then began a sequence of lower peaks and lower troughs (a downtrend) with a lengthy pause for the first few months of 2015 while it ranged above $34 from February to June. It clearly fell below this level in August 2015, indicating the majority of market participants believed it was now worth less than $34.

Until this downtrend is confirmed to have finished, there is a downtrend in place and we don’t like trying to catch falling knives.

The red curve on the same chart is the 30-week Exponential Moving Average (EMA). Stan Weinstein (who wrote the bestselling book Secrets for Profiting in Bull and Bear Markets) advised that a falling share price below its falling 30-week EMA is very bearish. The bottom half of the chart shows the Momentum chart indicator (the squiggly green line) with its own Moving Average curve in blue. With the Momentum recently revisiting past lows, this is also bearish.


Stock picking

If looking at some possible investment candidates and wondering which to choose, we could compare them as follows. If looking at our large resources stocks, BHP, Rio Tinto and Fortescue, we could plot their share prices on the one chart as in the accompanying diagram.

Comparing BHP Billiton, Rio Tinto, Fortescue (weekly chart, 1986-2015)

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This weekly chart shows the strong moves in share price for both Rio and Fortescue, which are smoothed out somewhat by using the log scale on the price axis. The linear scale would show a strong price spike for Fortescue in mid-2008. (This chart shows corrected data for any stock splits and consolidations).

We can see that BHP has had the less-volatile share price, which might better suit some investors. But how have they actually performed in comparison to each other?

About the author

Robert Brain runs Brainy’s Share Market Toolbox a web-based business supporting investors and traders. He is a National Director of the Australian Technical Analysts Association (ATAA), and also Vice-President of the Melbourne ATAA Chapter. The ATAA is a not-for-profit association of people interested in the application of technical analysis.

From ASX

The ASX charting library is a good starting place to learn more about charting techniques.

The views, opinions or recommendations of the author in this article are solely those of the author and do not in any way reflect the views, opinions, recommendations, of ASX Limited ABN 98 008 624 691 and its related bodies corporate ("ASX"). ASX makes no representation or warranty with respect to the accuracy, completeness or currency of the content. The content is for educational purposes only and does not constitute financial advice. Independent advice should be obtained from an Australian financial services licensee before making investment decisions. To the extent permitted by law, ASX excludes all liability for any loss or damage arising in any way including by way of negligence.

© Copyright 2015 ASX Limited ABN 98 008 624 691. All rights reserved 2015.
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