This might be an interesting week or two for the BHP and, by extension, the  Australia 200 index. BHP has hit a possible chart support zone, while iron ore is heading towards minor support dating back to 2009.

BHP chart support

BHP has hit the top end of a chart support zone between about $35.40 and $34.35.  There's quite a bit going on in the chart around these levels. Most notably the $35  area has acted as both resistance and support on 5 occasions over the past 2 years. This is shown by the horizontal support line on the weekly chart below.

The slow stochastic indicator in the box below the chart has now hit the oversold zone below 20%. This doesn't stop the market falling of course. But it does mean we could get quite strong upward momentum if BHP rejects this support zone

On the negative side, there's basically just blank paper on the chart if support around last October's low at $34.35 is broken. There doesn't seem to be much to stop a decline towards the blue trend line around $31.

BHP CFD Weekly Click to Enlarge BHP CFD Weekly
Click to Enlarge

 Iron ore chart support

As I discussed in a recent blog, there's a bit of support just under $80 on the spot iron ore chart. This goes back to 2009 but it doesn't look especially convincing. Trying to pick a bottom in iron ore would qualify as "trying to catch a falling knife" at the moment. However, it is a pretty mature downtrend that's got a 5 swing look about it. So some sort of consolidation or corrective rally that could help BHP bounce off it's support doesn't look altogether out of the question.

The Flash PMI on China's manufacturing industry due at 11.45am AEST tomorrow might be the next important test of  momentum on China related markets

Source: Bloomberg Click to Enlarge Source: Bloomberg
Click to Enlarge

Australia 200 chart support

Last week the Australia 200 bottomed at support around 5370. If BHP rejects the current support, it would be likely to coincide with the index rejecting its support as well. We could then be on track for a rally back towards resistance  around 5680

I made the case that bank dividend yields might support this scenario in a post last week

But the slow stochastic on the index is still trending down sharply and well out of the oversold zone. If the BHP support breaks, there could still be plenty of downward momentum left in Australia 200

Australia 200 CFD Weekly Australia 200 CFD Weekly

Bottom Line

Every trader will have their own approach to this situation.  Here would be one big picture way of looking at things:

  • BHP, iron ore and the Australia 200 are all in ongoing downtrends on the weekly chart
  • However, all 3 charts are at or close to possible support levels
  • A break below support by BHP and the Australia 200 could be a chance to join the downtrend with close stops (especially in the index which is still well out of its oversold zone)
  • However rejection of support by BHP and the index could be seen as a buy opportunity for reversal traders (especially in the index which might also be supported by bargain hunters chasing dividend yield in bank stocks)