Now that oil prices have finally found a bottom, the energy sector could start heating up. And that makes BP (NYSE:BP) stock a great deal more interesting if you’re in the mood for bottom fishing. Risks remain, to be sure, but there’s no denying the future for energy stocks looks better than it did before last week’s oil super spike.
I recently highlighted three oil stocks to buy in the wake of the historic rally in crude, but BP stock qualifies as another potential candidate.
Like most energy companies, BP exhibits a strong positive relationship with oil prices. That tie strengthened during the worst part of the crash, driving the correlation coefficient reading between both assets to 1. With such a strong link, oil hung like an albatross around the neck of BP, making it virtually impossible for the company to find a bottom until crude did.
Though the correlation has since eased and BP stock actually rebounded a few days before oil, there’s no denying that recovering crude prices will calm the selling frenzy seizing the energy sector.
BP Stock Charts
The weekly view for BP reveals the biggest risk of buying shares here. A major potential resistance looms overhead. And I mean major. The two most significant downturns in the stock of the past decade — one ending in 2010 and the other ending in 2016 — found support at $27. This price was the area where bear trends went to die. And that is what made this year’s breakdown all the more ominous.
Last month saw the stock crash through $27 on incredible volume. The subsequent follow-through cut BP stock in half in a mere eight trading sessions. But you have to be impressed by the snapback. The bounce has seen a groundswell in buying that suggests the bottom is in. This type of accumulation signals institutions are returning to the fray, buying in a big way.
I’d say this is the most powerful argument bulls have right now.
Unfortunately, we’ve now dropped below $27 again. Only this time, we’re testing the underside. If the principle of polarity holds, then this old support zone is liable to become new resistance. If you’re a buyer, I suggest patience. Better to wait until BP has chewed through any potential supply here than buy into the teeth of what could be a powerful ceiling.
Or, find an energy stock that isn’t wrestling with such a critical level.
If and when BP stock does climb through $27, bullish trades could be in the cards. What I wouldn’t do is short it here. The volume accompanying last month’s rally was way too compelling to bet against.
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