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BP PLC (NYSE: BP) rallied sharply during the month of October, giving it its biggest rally since the spring. During the month, BP gained 12.76%, which is the biggest monthly gain for the stock since October 2011. While the rally was impressive, my concern is that the bounce may be coming to an end.
Looking at the daily chart for BP, we see that the stock just recently hit its 200-day moving average before retreating a little. In addition to the moving average, there is a trend line that connects the high from June 2014 with a series of highs in May and June of this year. That trend line is just under the $39 level at this point in time.
In addition to the resistance from the 200-day moving average and the trend line, we also see that the stock recently entered overbought territory for a second time in the last month. While the stock managed to maintain its price level in October, it wasn’t facing the resistance points we see now.
Looking at the weekly chart, we see that the trend line with the high from June 2014 actually looks like the upper rail of a downward sloped trend channel. The lower rail is all the way down below $30 and is declining. We also see that the 52-week moving average is there to act as resistance and that the trend line has acted as support and resistance in the past.
The weekly oscillators aren’t in overbought territory yet, but they are climbing fast thanks to the sharpness of the rally over the last five weeks. The weekly stochastic readings are closing in fast on overbought levels, but the 10-week RSI has a little way to go before it gets there.
What is interesting about BP’s stock rally since the end of September is that it and other oil and gas exploration companies have rallied over 15% on average. Over the same time period, oil itself has gained 0.11%, meaning there is a disconnect between the performance of the commodity and the stocks in the sector.
The sentiment toward BP is mixed, as short sellers have completely shied away from the stock. The short interest ratio is 0.72 and analysts are pretty bearish toward the stock, with only three “buy” ratings to go with and eight “hold” ratings and one “sell” rating.
Given the layers of resistance on both the daily and weekly charts, I don’t like the idea of being long BP at this time. I would definitely be looking to short the stock between the present level and the $38 level, with a target goal below $30 a share.
In terms of a stop-loss, you could use any number of points – a weekly close above the upper rail of the channel, a weekly close above the 52-week moving average or a close above the 200-day moving average.
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