Chart of the week: Time to take profits at BP?

Can the BP gusher continue?

I have been avidly following BP for some time and thought I would update my coverage since it has suddenly become the focus of much bullish opinion in recent days as the oil price surged.

My latest position was to buy in my COTW of February 26 when the shares were trading at around 470p.

There were very few bullish opinions then since the market had fallen pretty hard from mid-January, as the oil price had fallen a hefty 9% from $66 to $58 (US Crude).

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But with the renewed advance in crude, BP has responded, and, on Friday, it hit my target at the 560p zone (see COTW of April 25). And crucially, with that strong advance, the bullish opinions have come thick and fast back out of the woodwork.

Where were they when BP was in a decline earlier this year? Of course, the reason is that pundits are herding, just like the vast majority of traders/investors! They follow the crowd -and the consensus then was bearish. It took a genuine contrarian to look at the evidence of the charts to see the likelihood of a reversal back up.

There is one rule you can utterly rely on - as markets rise, we see higher and higher price targets set by the pundits - and this has been in stark evidence with the recent advance in crude.

Naturally, they all have very convincing arguments to back up their views. They can cite all kinds of supply/demand factors, geopolitical considerations (Iran is one prominent factor at present). That’s how a herd is formed.

And when enough are convinced the market will keep rising, that is precisely the moment it tops out. Large bull runs always top out when things appear great. If you are at all interested in taking as much profit from a trade or investment as possible, it usually pays to give attention to extreme consensus views out there.

Let's recall the big picture on the monthly chart of BP

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

There have been some mighty big swings over the years! The all-time crude high was the $150 level in the summer of 2008 (note BP shares made a lower high then). And the famous $100 mark was set in the summer of 2014.

Since then, the market fell hard to the $28 low in January 2016 (the shale revolution) from whence it rose Phoenix-like (just as everyone was super-bearish with many targets set in the teens). Naturally, with the mood super-bearish, that was the perfect time to buy crude and the oil majors.

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So today, oil is trading at $70 (at my major target) and the shares are trading at my target above where they were when crude was at $100. That is a major divergence - and a warning for the bulls.

Of course, BP is not just an oil company any more - it is now in tech and mining as well as it tries to diversify away from the fossil fuel sector. But this large divergence must be putting a heavy expectation on its other activities.

Going back to the chart, we have reached a very important Fibonacci retrace level, and note momentum is fading - another warning for the bulls.

With two important targets under my belt, it may well be prudent to take at least some BP profits off the table for a tidy 20% gain. So much is riding on what Trump does with Iran, and that news should emerge later today.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.