Chart of the week: Is BP a buy here?
Since FTSE 100 (UKX) made its high last month, I believe stocks are generally in trading mode, not for long-term investing. Why? Simply because I believe in following the age-old wisdom of buying low and selling high. Sadly, because most become more bullish as stocks extend bull runs, they do the reverse. Buying high and selling low has never been a successful strategy for me.
That is why I consider stocks are for trading in this period.
The oil majors have taken a hit in recent days as the oil price has moved down off its highs. The mainstream media is full of gloom and doom stories about the rampant US shale production that will 'inevitably' crash the oil price. The feeling is that Russia and OPEC are getting into bed in a desperate but fruitless bid to prevent that.
If there is one thing you can be reasonably sure of is this: when something is 'inevitable' in the market, it rarely happens - at least for a while. That traps an awful lot of wrong-way bets right at a major turn with the inevitable (sorry) scramble to cover losing positions.
So, I am wondering if the currently oversold position in the oil majors is a buying opportunity. Here is the BP (BP.) chart going back to the 2006 high at the 720p high when crude was trading above the $100 area. The subsequent low at 300p in 2010 occurred as US crude traded below the $30 level in 2009.
Since then, despite a decent recovery in crude, it has failed to move above the very powerful resistance at the 510p area, and the latest attempt last month was likewise thwarted.
Note the rally to that high was built on a huge momentum divergence that indicated the c wave rally was much weaker than in the a wave. That is normally a warning sign to expect a reversal back down.
So, should we be looking at a short trade? Not necessarily, because the monthly chart indicates only the long-term trend, it is of little help in pinpointing the current shorter-term trend. Here is the daily for that purpose:
I have a pretty five-up to the January 530p high on a momentum divergence and then a three-down to the 455p level which closed a small gap in September. Remember, gaps act as magnets, no matter how old they are!
So now the odds favour a rally to at least the pink zone which is a 50% retrace of the move down. And if crude oil can build on recent strength, the outlook is for even higher prices.
But, in reality, this share is never going to be in bitcoin’s league. It is the traditional 'widows and orphans' category but, even so, astute traders can still profit.
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