BP stock gains ground, but major resistance looms

By Reuters
Posted Aug. 6, 2010 at 10:05 a.m.

Shares in BP rose 1.2 percent in London on Friday, taking their bounce since the near 14-year low in June to 45 percent, lifted by the group’s latest progress in plugging the ruptured oil well in the Gulf of Mexico.

Chartists, however, say the six-week relief rally in the shares of BP, the biggest company by market capitalization on the London bourse before the oil leak, could soon run out of steam as major resistance looms around 445 pence — the lower end of wide gap that occurred in early June as the stock was spiraling down.

A gap is a break between prices on a chart which happens when a stock makes a sharp swing up or down with no trading occurring in between.

“It was a breakaway gap with strong volumes. These gaps are very difficult to fill,” said Vincent Ganne, technical analyst at IG Markets. “At a gap like this, you don’t buy.”

Usually in a rebound, investors tend to book profits when getting close to a downward gap, the chartist said.

“Even if we know that the oil leak has been stopped, there is no visibility on the total costs for BP over the next years, so it’s not like if the crisis is behind us and the stock is back in a solid upward trend,” Ganne said.

The stock was also hitting another key resistance level on Friday, its 38.2 percent Fibonacci retracement of the drop from its level in mid-April, before the oil leak started, and the low point in June, touching the level but failing to move above it.

Chartists also pointed out that the stock was reaching the upper band of the Bollinger Bands, a signal that the shares could be overbought, although the chart’s Relative Strength Index, another technical tool to identify if a stock is overbought or oversold, did not show BP’s stock in ‘overbought’ territory on Friday.

“The fact that a stock hits the higher band of the Bollinger is not necessarily a strong ’sell’ signal, especially if we’re in a solid uptrend market. But in BP’s case, this has been a technical bounce, so the recent rise is fragile and piercing the upper Bollinger band is adding to the negative bias,” IG Markets’ Ganne said.


But the main negative signal from the Bollinger Bands on BP’s stock was the fact that the bands were narrowing, which usually warns of a sharp move in the short term.

“The tightening typically signals a change in trend, and because this is happening as the stock is running into strong resistance around the gap, the timing is good for booking profits,” the analyst said.

But despite charts pointing to a halt in BP’s steady bounce, the downside risk could be relatively limited, said David Thebault, head of quantitative sales trading, at Global Equities.

“The stock is coming back from the abyss, the newsflow is now relatively positive, and a few heads have rolled,” he said.

“The stock might dip a bit, but not really below its 50-day moving average, which is around 385 pence. The leak has been stopped, now it’s a management story, to straighten up the company.”

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