Interactive Investor

Chart of the week: the oil majors spring to life

The oil price bucked the consensus for a downwards slide – but what comes next?

14th December 2020 14:02

John Burford from interactive investor

The oil price bucked the market consensus of a continued downwards slide – but what comes next?

In my article of 19 October I made a strong case for buying shares in oil stocks BP (LSE:BP.) and Royal Dutch Shell (LSE:RDSB). My chart analysis and sentiment reading led me to that conclusion, which was a highly contrarian stance. Market consensus had the oil price sliding in the face of reducing demand, with oil company shares following.

But since financial market prices do not follow the mainstream ‘fundamental’ economic cause-and-effect model (as most believe), there was a very strong case to be made for the oil price to actually improve. And with bearish sentiment in full flow, any surprises were likely to be to the upside. That is precisely what happened.

This was the weekly chart of BP I showed in October:

Source: interactive investor. Past performance is not a guide to future performance.

This is what I wrote:

“If I am correct, we may have here one of the best opportunities to pick up shares in class companies with modest downside risk, if any. I am adding them to my buy low/sell high list. My first target is around £3.50.”

The share price was trading around the £2 region, as it was making new lows. The fifth wave had already done enough to consider the five down pattern complete. It not only made a new low below the wave three low, but there was a mammoth momentum divergence staring us in the face. How could I ignore that?

In fact, the £2 mark was the actual bottom, as the shares moved up briskly from 19 October as the crude oil price advanced.  Here is the updated action on the daily chart:

Source: interactive investor. Past performance is not a guide to future performance.

It has now advanced to the £2.80 area, where it enters overhead resistance. Odds are that it should now experience a dip before renewing the uptrend towards my £3.50 target area.

Short-term traders eyeing a 40% gain may well be looking to take some profits here, with a view to re-instating positions on any dip. Longer-term holders/investors will hold, as they have a potential ‘whale’ trade as they performed one of my ‘buy low/sell high operations.

Note that my October call broke one of the golden rules of investing: Never try to time tops and bottoms. Most equity pundits proclaim it is impossible to time these, so it is best to wait for a trend to become established and join that. These ‘experts’ obviously have never studied basic charting techniques.

The obvious counter is that is yes, it is possible to pick them, and with low risk. If you wait for an obvious trend it is likely over by then!

For more information about Tramline Traders, or to take a three-week free trial, go to www.tramlinetraders.com

John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.

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