TAKING STOCK: Selling Exhaustion Triggers BP Bounce

30th Jun 2010 19:32

By Tomi Kilgore Of DOW JONES NEWSWIRES Sometimes there's no better explanation for why a stock starts to rally than because it just stopped going down. The U.S.-listed shares of BP PLC (BP, BP.LN) have lost half their value since the beginning of the year, underperforming the broad stock market by a wide margin, as well as every component in the SPDR Energy Select Sector exchange traded fund (XLE). The stock's recent behavior and some positive technical developments suggest that finally, sellers have exhausted themselves enough to trigger a significant bounce. The stock opened Monday with a 2.3% gain, rallied a bit, then fell to a 14-year low of $26.75 in intraday trading before recovering slightly to close up 0.1%. The failure to sustain gains and the new low might look like bearish behavior, but the positive close in the face of mild losses in the stock market and the broader energy sector was a subtle warning that a bounce may be brewing. Then Tuesday, with the S&P 500 Index sliding to a new low for the year, oil prices falling sharply and the XLE hitting a near 10-month low with all 38 components touching negative territory, BP managed a 2.2% gain. It takes more than an analyst's "what if" acquisition scenario to produce a stand-alone gain like that. Meanwhile, there have been some bullish divergences in some technical indicators. For example, the momentum , which measures the change in the power of a trend, has been rising since June 14 while the stock continued to decline. This means relative to past behavior, the stock is starting to act more like it's rising than falling. Separately, the stock tumbled 29% from April 15 to May 28 while short interest declined nearly 20% to reach the lowest levels seen in three years. From May 28 to June 15, however, when the stock slid 27%, short interest quadrupled to 25.71 million shares from 6.59 million shares. The selling is no longer just bulls liquidating long positions. Speculators joined the selling party in droves. If you combine the stock's behavior the last couple sessions, the bullish technical divergence and the high level of short positions, it's enough to make bears a little worried. The fact that the stock gapped up Wednesday--the stock's opening trade of $28.73 on the NYSE was above Tuesday's intraday high of $28.15--and extended its gains in afternoon trading, suggests the more nervous shorts have already begun covering their positions. The stock was last at $28.86. If the stock gets above resistance at the $29.50 to $30 level, where there were a few intraday lows a week earlier, a more powerful short-cover rally could ensue. Getting through the $32.50 to $33 area, which capped several rally attempts in mid-June, would likely trigger a further short-squeeze. Keep in mind, however, that any bounce from current levels would still be characterized as a countertrend, short-cover rally. The real buying won't start until sellers try pushing again, and fail. (Tomi Kilgore writes Taking Stock, a global column that gives insightful analysis about equity-related topics around the world. He can be reached 212-416-2470 or by email at [email protected].) (TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at [email protected]. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments.) (END) Dow Jones Newswires June 30, 2010 14:32 ET (18:32 GMT)