Chart of the week: Take profits before BHP's results?

I have been covering BHP Billiton since the winter lows at around £6 in January, when I explained that the market's slide was almost certainly coming to an end, based on the chart wave patterns I had found. Remember, this was when sentiment towards commodities was in the pits and commodity shares such as BHP were probably among the least-loved on the board.

Not that there was a shortage of hated shares back then. This was the time when stockmarkets were in free-fall as fears the Chinese economy would implode were rife.

In fact, the general indices continued falling in January and made major lows the following month. But because of the BHP's wave pattern, it appeared likely that commodity shares were about to turn up ahead of the FTSE 100. This was the chart I showed on 4 January:

The market was close to completing wave five and probably had one more up/down sequence to put in the final bottom. And the market duly obliged and made that new low at around the $6 level. This was the updated chart I showed in my Chart of the week of 22 February:

So the January low completed both red and purple fifth waves and was turning back up. I had my initial targets at £8 and then £9 set. And since then, these targets have been reached.

Here is the weekly chart updated to Friday:

Now, I have a terrific tramline pair working with very accurate touch points on both lines. These lines are very solid lines of support (upper and lower). Remember, when the market trades under the upper tramline, it is a line of resistance. When the market breaks above it, it becomes a line of support.

So with the upper tramline break in late June, the shares have been confirming that bullish event by moving higher with the generally bullish tone to commodity prices. In fact, iron ore prices have been very firm of late - and that has surprised many pundits, given the apparent sharp stockpile build-up in China.

Let's zoom in on recent action. Here is the daily:

The feature that stands out is the five-wave continuation pattern between the tramlines. This is a fairly common pattern that appears as a zig-zag with overlapping waves. It is not to be confused with a five-wave impulse pattern.

And one of its most useful features is that it can be used to forecast a price target. Because it usually lies about half-way along a wave, I can place this target at roughly the same place as the Fibonacci 50% retrace of the wave off the March 2015 high.

That sets my double target in the £11 region. Remember, I also have a £12 target working (top chart).

If this first target is reached, it would hit the doubly strong resistance there and set up a possible reversal. Keep in mind that the shares remain in a long-term bear trend and the rally off the January low is very likely only a bear market rally.

We know that bear market rallies usually take the form of an A-B-C three-wave affair, and this knowledge can provide me with a likely roadmap for the medium term.

If the market does make a turn down between now and the £11 target, that would be wave A. A decline from there would be wave B and then a resurgent market would put in the final C wave, which would likely exceed the A wave high and possibly make it to my £12 target. That certainly would be a very pretty result.

This is what the weekly chart could look like:

Wave B could descend to the upper tramline around the £8 region to plant a traditional kiss before moving back up in wave C at around £12.

Latest company results will be released tomorrow and most are expecting heavy losses. But has this been priced in already? That is always the question! We shall find out tomorrow, I am sure.

But with the shares trading very near my ideal £11 target and anticipating the A wave high, prudence suggests taking at least some profits off the table ahead of results. And from the £7 level, that is a tidy gain of 50%.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.