Trade The Swing In British Petroleum (BP)

The bears’ frustration has only intensified over the last week as equity markets continue to ascend higher with no clear resistance in sight. Selling pressures did resurface briefly on Wall Street after investors digested commentary from European Central Bank President Draghi who noted that the euro’s recent strengthening in the currency market could hinder the currency bloc’s already sluggish recovery. Last week’s U.S. dollar rally kept a lid on commodity prices across the board; ags took the worst beating while gold failed to take on safe haven appeal once again [for more market news and analysis subscribe to our free newsletter].

Chart Analysis

Decrease in commodity allocations

Energy behemoth British Petroleum (BP) endured a tough few sessions last week as the stock digested gains, and after all that the profit-taking shares ended slightly above where they kicked off 2013. Despite this weakness, BP appears to have completed a healthy correction judging by the fact that the stock remains above its 200-day moving average (yellow line); furthermore, it’s worth noting that BP has managed to carve out support around $43 a share this time around, a slight but noticeable improvement from its previous base, which was closer to the $42 mark.

Click to Enlarge

BP’s ability to hold support at current levels is encouraging when we consider the longer-term trend at hand; notice how since bottoming out at $36.25 a share on May 31, 2012 this stock has been trading higher within a crudely defined upward-sloping channel (blue lines). As such, entering into a long position at current levels is appealing for two reasons. First, traders can favorably position themselves in anticipation of BP’s rebound off its support line. Second, because the stock is trading near a major support level, traders can closely manage their downside risk by setting a stop-loss above or near $42 a share depending on individual risk preferences [see 5 Commodity Trading Mistakes You Could Be Making].

Outlook

Given BP’s longer-term uptrend at hand, its recent pullback presents an attractive entry point for those eager to tap into the energy sector. If equity market euphoria persists, BP should swing higher towards the upper half of its trading channel over the coming days; in terms of upside, selling pressures may strike anywhere between $45-$46 a share. On the other hand, if bullish momentum fails to return, BP could re-test its 200-day moving average; in terms of downside, this stock has immediate support around $43 a share followed by the $41 level. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit-taking techniques.

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Disclosure: No positions at time of writing.

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