Along with the broader averages, BP (NYSE:BP) has enjoyed a sizable rally in recent days, weeks, and months. The question for today’s investors is: Does BP stock have more fuel in its tank to drive even more value into the pockets of shareholders? Let’s dive into what’s happening off and on the price chart to allow for a stronger risk-adjusted determination.
Monday was classic Wall Street. Just more than two months from the bear market low set in motion by the novel coronavirus, the S&P 500 managed to scratch its way back above water on the year. Investors bid the broad-based average higher by 1.21% on continued follow-through tied to Friday’s stronger-than-forecast jobs data. This resulted in increasing optimism for a smooth economic recovery.
For its part, multi-national oil and gas giant BP staged an even stronger performance. On top of Friday’s dazzling near-8% jump, BP stock rallied an additional 2.42% Monday. But is it time to realize some problems aren’t fully behind us and could still cause temporary harm? There are reasons to think just that.
As investors toasted the seemingly once unthinkable in the market, the National Bureau of Economic Research officially announced the U.S. is in a recession. By their reckoning, the downturn in the economy began in February. At the same time, BP investors also managed to shake off news of 10,000 job cuts to its worldwide workforce due to a Covid-19-induced global slump in demand for oil, as well as worsening supply problems caused by disagreeable OPEC member states.
It begs the question, are BP shareholders due for a rude awakening in the near-term? Possibly. And I wouldn’t bet against some profit-taking in shares. Weakness should also be met with optimism by tomorrow’s buyers.
Pros and Cons
As InvestorPlace’s Tezcan Gecgil argues, BP has a lot going in its favor. The company’s aggressive, below-the-market break-even schedule for oil puts it in a strong position to withstand a downturn. By 2021 that’s estimated at $35 a barrel. A strong portfolio commitment towards renewables and Saudi Arabia’s sovereign wealth fund stepping in to buy shares during the worst of the coronavirus are longer-term reasons to see greener days ahead for shares of BP.
To be clear, if the most dire economic forecasts proffered during the coronavirus began to make their presence known, BP would have some real issues. Then again, how many people would be purchasing Apple (NASDAQ:AAPL) products or booking trips to Disney (NYSE:DIS) World?
Bottom line, today’s BP investors may want to acknowledge the company’s 9% dividend is possibly at risk. But as the Covid-19 bear market has shown, more dire predictions aren’t worth yours or my time if you’re looking to profit in shares of BP.
BP Stock Weekly Chart
Source: Charts by TradingView
Last week’s Friday jobs-related boost allowed BP shares to add nearly 20% for the five-day period. The price action also importantly allowed the stock to stage a convincing higher volume breakout from a weekly triangular pattern.
Currently and back to our thoughts on profit-taking in the near-term, shares are modestly lower Tuesday. With stochastics overbought and BP sandwiched in-between the 50% and 62% retracement levels, the expectation is for a larger pullback to form within a developing uptrend.
Our eyeballed illustration of this promising trend-line and where ‘X’ resides on the weekly chart near $25 a share, is viewed as a constructive rather than destructive level of profit-taking. For the time being, BP is a name to watch for purchase as the share price pulls in and conditions turn more neutral.
When and if an opportunity to buy on weakness is closer to setting up, my other recommendation for intermediate-term investors would be to hedge BP shares with a short call and long put combination. This strategy, known as a ‘collar,’ offers investors the opportunity for a better night’s sleep and definitely a much stronger risk-adjusted position which fully limits and reduces exposure.
Investment accounts under Christopher Tyler’s management do not currently own positions in securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits
