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In yesterday’s column, I wrote about the United States Oil Fund (NYSE: USO) and a number of big oil companies that had appeared on my nightly bearish scans in the two previous days. Another one appeared on last night’s bearish list and that was BP Amoco (NYSE: BP). I don’t want to harp on the big oil companies too much, but BP presented a different scenario when I delved into the chart deeper.
BP appears to be forming a head and shoulders pattern and this gives me a good chance to show what that pattern really looks like. Head and shoulders patterns are sometimes confusing, but hopefully after reading this you will understand them better.
In the stock chart above I have marked each part of the head and shoulders pattern as it stands right now. Note the neckline is sloped slightly upward and that is ok, it still meets the criteria as a head and shoulders pattern. Now for confirmation, BP will need to break below that neckline somewhere in the near future. Given the overbought status based on the slow stochastic readings, I would say that is entirely possible.
One of the things that I took note of regarding the formation of this head and shoulders pattern is the symmetry. What I mean by that is that it took around ten days for the stock to drop from the left shoulder to the neckline. It then took 14 days for it to bounce from the neckline to form the head. It was then 14 days from the head down to the neckline again and it was approximately 1o days back up to form the right shoulder. Not all head and shoulders patterns are this symmetrical.
One thing you will want to keep in mind with BP is that the company is set to report earnings later this month. I checked four different sources for the earnings date and one said April 27 and the other three said April 29, so I am going with April 29. The consensus estimate for BP is that the company will earn $1.13 per share for the quarter and that has been ratcheted up from $1.11 over the past 30 days. So expectations are rising.
There are 16 trading days between now and the earnings date and that gives the head and shoulders pattern time to play out. Looking back at the past few earnings reports, they have had mixed reactions for the stock. There were two times that the stock gapped higher, one time that it gapped lower and one time where the stock pivoted from a pullback to start a rally (in fact that was the initial formation of the neckline).
I look for BP to fall over the next three weeks and it should drop below the neckline. However, given how the stock has reacted after their earnings reports over the past year, I would not want to carry a short position into the earnings report. I say short it here and play it down to the $45 level and get out before the earnings report.
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