World’s Largest Miner Cuts Spending,
Sees Weak Global Economy

technical analysisAfter so many years mired in a weak global economy, many investors were hoping that 2012 was the year of the rebound. Not so fast, according to BHP Billiton Ltd. (NYSE/BHP). BHP recently announced that it was reducing the total amount of money spent on expanding production and developing mines, which it previously estimated would be $80.0 billion over the next five years.

BHP is plugged into the global economy. It has access to many countries all over the world, getting the feel of how the global economy is performing. The company then takes this analysis of the global economy and generates estimates for future growth. BHP reported that it sees a weaker global economy and lower prices for the commodities that it mines and sells. Part of the reason for this, according to BHP, is the European crisis, which is obvious to almost everyone at this point, and weakness in China. Many investors looking at the global economy feel that China will “come to the rescue;” but here is one of the better informed corporations stating that in its view that won’t happen.

global economy

Chart courtesy of www.StockCharts.com

Looking at BHP from a technical analysis point of view, we have first the weekly chart. When studying technical analysis, I like to look at the trendlines in technical analysis from a long-term point of view. The first significant warning sign obtained from technical analysis occurred last summer, as the stock broke below the uptrend line going back to 2009. The stock naturally fell to the 200-period moving average. The stock then used the 200-period moving average as support, as it tried to regain the momentum to start a new bull run.

You will note that the downward sloping trendline since April 2011 has shown that each major high was lower than the previous one, a very bearish indication when studying technical analysis. This weakness finally culminated in the capitulation by the bulls, what was left of them, as the stock broke another long-term support level and the 200-period moving average. In technical analysis, adding together all of these signs paints a picture of a stock with very weak internal strength.

technical analysis

Chart courtesy of www.StockCharts.com

Looking at the technical analysis of BHP on a daily basis, you will notice the strong resistance met by the 200-period moving average. In technical analysis, the more often an indicator shows its importance, the more respect one must pay to it. Now, for all of the bad news we’ve discussed in technical analysis, the stock could make a short-term bounce, as it is entering oversold territory. But, this would not be the only reason to buy, as a stock could continue going down even if it’s “oversold.” That term is a relative one, not absolute. Notice that the low of last year pivoted at approximately $62.50. That is a significant point of interest in technical analysis. Now you have a point of reference along with a slightly oversold stock. What technical analysis does tell us is that, even if the stock were to move up, many investors would take that opportunity to sell, as we’ve seen all year long. Technical analysis of this stock would indicate that, unless the price can exceed its long-term downtrend resistance level, it won’t be in a new bull market.