Oil prices are rocketing back from the abyss, and it’s helping energy stocks find their footing. The insane volatility plaguing BP (NYSE:BP) stock has finally subsided, and shares of the London-based oil & gas giant are carving out a trading range.
While it hasn’t made for much trading opportunity over the past month, the sideways drift in BP stock is creating easy-to-spot price levels that spectators can focus on.
Let’s take a fresh look at the action in oil and the energy sector. Then we’ll build out two trade ideas for BP bulls and bears to consider.
The Inevitable Oil Rebound
Crude prices rallied for the sixth straight session Tuesday amid hopes that reopening economies across the globe would jump-start demand. Countries are easing lockdowns and citizens are finally emerging from their homes.
As mobility begins anew, oil traders are striking an optimistic tone. The rebound was as dazzling as you’d expect for such an oversold and volatile asset. From last Tuesday’s low to this morning’s high, West Texas Intermediate gained 159%.
There are still plenty of issues that could thwart the fledgling recovery, mind you. It’s going to take time for consumption to come anywhere close to where it was before the pandemic.
Additionally, the supply glut has storage capacity shrinking rapidly. Both issues won’t be fixed overnight. But let’s not be too quick to throw cold water on what has been an epic snapback. The bulls deserve credit, so credit we’ll give them.
Energy Sector
The reaction from energy stocks hasn’t been nearly as vigorous. But after the type of world-altering volatility seen during March’s freefall, we could do with some stability.
The Energy Sector SPDR (NYSEARCA:XLE) is essentially flat over the past six sessions. Over the past six weeks, XLE has returned to the scene of the early-March gap that saw the fund crater 17% overnight in response to the Russia-Saudi oil price war. If the energy sector can chew its way through the supply and fill the gap, it will mark a significant milestone for the recovery.
For now, the fact that XLE has been able to trend higher above a rising 20-day moving average for six weeks is a victory to be celebrated.
BP Stock Charts
Let’s take a top-down approach to see how the action in oil and the energy sector have filtered through to BP shares. The weekly time frame shows a stock stuck in the middle of no man’s land. Because of March’s historic plunge, it’s going to take months to turn the long-term trend back up. For now, the initial snapback from oversold conditions is over and the stock is carving out a range.
Because the range is forming in the middle of this year’s high and low, there’s actually a lot of room to run to the upside or downside. It all comes down to which way we break.
The daily trend is neutral with equal pivot highs and lows defining the price action. The declining 50-day moving average has finally caught up and is acting as resistance so far. But we’ve yet to break horizontal support, so the range remains intact for now. Rather than guessing on the direction of the inevitable range break, I suggest waiting for confirmation first.
The BP Stock Trade Setup
Mark $26 and $21.30 on your charts. These are the high and low end of the consolidation zone and need to be taken out to confirm a breakout. It will also signal the return of momentum. Until then, I don’t see any reason to get involved.
To be clear, BP stock is a buy over $26, and a potential short under $21.30.
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