By Ben Turney
I’m hard pressed to think of a company, which has attracted more negative headlines over the last few years than BP. Admittedly much of this is deserved after the woeful operational failings, which led to the Deepwater Horizon disaster in 2010, but the recent coverage has been increasingly dramatic. And as such I smell an opportunity.
As the costs of the Deepwater Horizon compensation fund have spiralled, it has been reported that this is running out and BP would have to make additional provisions, further battering its already beleaguered balance sheet. The company’s PR machine kicked into gear, as an increasing number of stories pointed to widespread, alleged fraud among claimants, but even so there have been suggestions that this affair might bring down one of the remaining titans of British industry.
In such a pessimistic environment it is no wonder the share price has suffered. However the question is has it suffered too much?
On a fundamental basis BP’s P/E is 5.14 and its dividend yield is 5.25%. While this isn’t quite pricing for failure, these figures do look very cheap compared to its peers. Of course those companies aren’t currently facing the ongoing wrath of the US Federal Government, but BP has gone to great lengths to ensure its survival. It seems inconceivable that the company will fail now, having endured the last three years and if the charts are anything to go by the market seems to agree.
Below is BP’s 5 year MIDAS chart;
BP’s Primary MIDAS Support (JUN2010) is 439.45p and the price closed at 442.95p on Friday. JUN2010 support looks significant for two main reasons. First, it launched at the nadir of the Deepwater Horizon crisis. If you remember back to that time, it took a few weeks for the market to realise how serious that event was. The price did start falling, but as various attempts at plugging the leak failed and oil flooded into the Gulf of Mexico, panic gripped the stock and it sold off on massive volume. This was then followed by a sharp rally.
For the MIDAS user, this trading pattern made placement of the JUN2010 support line quite easy. The Deepwater Horizon event clearly represented a fundamental change in the circumstances of the company and the bottom in the market was extremely pronounced. Taken together, these points meant MIDAS users could assign a fair degree of confidence to the JUN2010 support line that it would provide reliable trading opportunities.
This leads to the second reason the current price looks significant. If you look at the MIDAS chart above, each time JUN2010 support has been breached, when the share has recovered and risen back through this support line, then the price has gone on to make solid gains. Admittedly some of the breaches have been long lasting and some of the gains have required patience, but the price movements towards the end of last week exhibit a fair degree of technical strength;
It is true that BP failed to holds its 200MA, which is widely regarded as a bearish sign. However I am more encouraged that Thursday and Friday’s rally occurred at MIDAS support. Daily RSI dipped to 28.18 and this looks like it brought buyers back into the market.
For one reason or another, I didn’t get my act together on Friday to open a long on this stock and I regret that. My hope now is that we don’t see much of a gap up on Tuesday at the open. Assuming the price remains at or about 442p then I plan to buy. The charts suggest there is resistance at about 475-480p, but I would probably seek to start to derisk at 452p (the 200MA). Overall this looks like a relatively low risk opportunity to use leverage on a blue chip stock, with minimal risk. If the price does take a plunge from here, I can limit my exposure with fairly tight guaranteed stops. However, to me, the charts suggest BP is about to turn higher.