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Long or Short BP Stock? Here's What Charts Say

Tuesday, 27 Jul 2010 | 2:55 AM ET

Even though BPappears to have plugged its massive oil leak in the Gulf of Mexico, the firm continues to stay in the spotlight, with CEO Tony Hayward stepping down as investors digest a ugly set of quarterly earnings from the oil giant.

BP's stock has lost about half its value since the Gulf disaster in April, or a $100 billion dollars. For investors, is it worth getting in now, or will the stock continue its sell-off?

From a chartist perspective, BP's stock has been the subject of "vulture trading," which pretty much means exactly as it counds. This is a trade that picks on the carcass after the stock's been killed by the market.

The first vulture trades were from the short side as the BP's London listing slipped from 666p to 290p. (For the purpose of illustration, I've used BP's London listing. But the trend is similar for BP's ADRs in the U.S.)

The key question for the "short vultures" is to decide if its time to cover short. The "long vultures" are those who pick over the bones; they will be asking if it's time to go long.

The volatility of price behavior provides some trigger points where these two groups of vultures can make a decision. We use two measures of trending and price volatility changes. The first is a simple trend line. The trend line does not start from the peak at 660p. It starts from the descending series of highs starting around that figure. A reliable trend line has at least 3 anchor points. The strength or validity of the trend line in a downtrend is proven when subsequent prices retreat from the trend line value. This has happened in recent days.

The trend line is invalidated when price closes above the trend line. The "long vultures" are looking for this situation. However, a break above a trend line is not enough by itself. We look for a confirming indication that the current range of price volatility has been exceeded. For this we use a Guppy count back line, discussed more fully in my book Trend Trading.

The Guppy count back line is a short term resistance or support line calculated, in a falling trend, from the most recent lowest low. The method is designed to identify the pivot point low of a downtrend. The looser candle in the trend is used as a starting point and the trader counts back two higher highs A horizontal line is projected from this third high. This line is the value of the Guppy count back line. This is a self adjusting volatility stop. A close above this short term volatility based resistance line suggests the down trend has changed.

To reduce whipsaws the technique is used when a trend break has been signalled initially by a trend line break. A close above the downtrend line is an early warning signal of the potential for a trend change. It may be accelerated by internal developments in company management. A sustainable change in the trend has an increased probability when the price is able to close above the Guppy count back line value at 448.16. Failure to break above this level will catch many long vultures. A close above this level is a signal to "0short vultures" shorts to cover positions.

BP has the characteristics of a rally in a downtrend. A close above the trend line and a close above the Guppyy count back line increases the probability of a genuine trend change. Failure to break above the Guppy count back line sets the conditions for a continuation of the downtrend, possibly using the downtrend line as a support level. In this situation traders would look for the development of a double bottom near 290p.

BP remains a meal for vulture traders.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.

If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.

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