Chart of the week: are BP shares a buy at this level?

28th February 2022 12:58

by John Burford from interactive investor

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After deciding to jettison its interest in Rosneft, BP shares fell sharply. Here’s what technical analyst John Burford thinks of the oil major’s prospects now.

Over the weekend, the real and the financial worlds have been rocked with Vladimir Putin invoking the nuclear option (squarely aimed at the West and not so much at Ukraine). And with Russian sanctions being stepped up sharply, financial institutions have been ordered to divest any Russian assets they own – and that includes BP (LSE:BP.)'s large stake in the huge Russian state-owned Rosneft (LSE:ROSN) company worth about £12 billion.

The knee-jerk reaction Monday morning was to mark BP's share price lower (contrarily as crude oil surged). But has this thrown up another buy-the-dip opportunity for BP, which is the sister company of Shell (LSE:SHEL) that has just announced it will raise its dividend this quarter?

After all, oil prices remain in a strong uptrend and profits remain robust.

Here is the very fascinating daily chart:

Past performance is not a guide to future performance.

On 11 February, BP shares made a high in the 420p area and began a correction. I was then about to draw a line joining the three major highs (upper arrows). I now have a solid line of resistance into the future. With the three accurate touch points, I could then draw a parallel line and noted the multiple accurate touch points on the line beneath (five lower arrows).

With five touch points, I now have a solid line of support into the future.

Isn't that remarkable? Why should a parallel line confirm so precisely to one above? I have not drawn these lines at random - the market has decided where they should be placed.

That sets my fail-safe level for any further corrections at the 330-340p zone (currently 353p).

I have thus set out my roadmap: if the shares decline into the 330-340p zone, I will take that as a failure of the bull model and lighten up positions. That failure would be either temporary or permanent – there is no way of accurately judging this in advance (although we may have views).

But if the current level holds, I expect the old high at 420p to be reached and likely exceeded. Therefore, I have a reward/risk ratio for a long trade at about 3/1. That is acceptable.

Of course, much will depend on the future course of oil prices and the state of the global economy. Most sober reviews of the global energy outlook call for an increase in fossil fuel use which BP is well positioned to supply.

If only it was that simple! Many institutions already have a policy of divesting their fossil fuel investments, including BP, and the current Russia sanctions have only magnified that urge.

But at current levels, BP is a buy.

John Burford is a freelance contributor and not a direct employee of interactive investor.

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