This is a big week for oil companies reporting earnings as Chevron (NYSE: CVX) and Exxon Mobil (NYSE: XOM) will report on Friday, while Conoco Phillips (NYSE: COP) will report on Thursday.
BP PLC (NYSE: BP) released earnings Tuesday, and the results caused the stock to gap higher. Analysts expected BP to lose $0.30 during the quarter, but the company actually earned $0.17 per share. The BP earnings surprise lifted the stock, but doubters are pointing out that the positive earnings came from cost cuts, as revenue dropped 30% from the same period one year ago.
Regardless of what the doubters are saying, the stock jumped 5% at the open Tuesday. A gap higher would normally be a good thing, but the charts are telling me otherwise. On the daily chart we see the gap, but we also see that the daily oscillators are in overbought territory. The 10-day RSI in particular caught my attention, as it hasn’t been in overbought territory since last November, right before the stock fell 25%. The stochastic readings have been in and out of overbought territory for a while now, but they have remained above 80 for an extended period for the first time since last October.
The weekly chart shows a couple of other items that make me think the gap higher might be short-lived. We see a downward-sloped trend line that connects the high from June 2014 with the highs from the second quarter of 2015. That trend line is just overhead at $34 and is just above the 52-week moving average, giving the stock two layers of resistance it will have to get through.
We see that the weekly oscillators are also approaching overbought levels, with the weekly stochastic readings at 91.13 and 79.28. The 10-week RSI is at 62.07 and the 62 area was a turning point for the indicator last year at this time. Last spring was also the last time the stochastic readings were in overbought territory.
The sentiment toward BP heading into the earnings report was mixed. The short interest ratio was low, at 1.31, which indicates bullish sentiment from short sellers. On the other hand, analysts were far more cautious with five “buys,” six “holds” and one “sell” rating. With the revenue number falling so sharply, I wouldn’t expect the analysts to change their stance anytime soon.
I think the gap higher is presenting an opportunity to short the stock. It isn’t going to be lifted by short sellers covering with such a low short interest ratio and analysts’ upgrades seem unlikely. I would look to short the stock above $33 with a downside target of $27 at the very least.
The stock hit the $27 mark twice earlier this year and should it drop below that support, we could see it drop another 10% or more. On the chance that the stock moves higher, I would use the $35 area as a stop-loss point.
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