Do Technical Indicators Hint at Strength for BP Stock?

BP (BP) stock has had almost flat returns in 2019, and its stock is up by 0.3% year-to-date and 0.1% quarter-to-date. Lower oil prices have impacted the stock’s performance. The company’s earnings have declined this year due to weaker upstream realizations and revenues.

Year-to-date, peers ExxonMobil (XOM) and Royal Dutch Shell’s (RDS.A) stock prices have risen 2.7% and 0.7%, respectively. However, the equity markets have touched record highs this year. The S&P 500 Index has risen 28.5% year-to-date.

However, business conditions seem to be improving, as oil prices are estimated to recover next year. Plus, IMO 2020 is strengthening the refining cracks and oil spreads. So, better oil prices, cracks, and spreads could support BP’s upstream and downstream earnings. The expectation of better profits in 2020 could support the stock in the coming months.

In such a scenario, let’s evaluate BP stock on technical indicators like RSI (relative strength index), DMA (days moving average), and IV (implied volatility).

BP’s DMAs still in the red but improving

The marginal movement in BP stock this quarter has brought about smaller changes in its DMAs. In this quarter, BP’s 50 DMA has risen 1%, but its 200 DMA has declined 2%. This has narrowed the gap between both DMAs. BP’s 50 DMA stood 7.5% below its 200 DMA at the beginning of the quarter, October 1. Now, BP’s 50 DMA stands 4.6% below its 200 DMA.

So, BP’s 50 DMA seems to be moving closer to its 200 DMA. If it manages to cross over its 200 DMA, it would reflect a positive breakthrough for BP stock. When a short-term DMA (50 DMA) crosses over a long-term DMA (200 DMA), it implies that the stock price rise could accelerate. Although BP stock still needs to cover more ground before reaching the crossover level, the narrowing gap between DMAs shows technical improvement in the stock’s position.

BP’s RSI hasn’t yet reached the overbought zone

RSI is a momentum indicator that shows whether a stock is overbought or oversold. A stock’s RSI above 70 indicates that the stock is considered overbought, which means the stock’s price could fall. However, if RSI is below 30, then it considered oversold. This condition points to an expected rise in the stock price.

BP’s RSI stands at 50, meaning that it is neither in overbought nor in oversold territory. The RSI level also means that the stock price has quite a bit of room left to reach the overbought zone—a good sign.

IV declines

Implied volatility in BP stock has fallen from 21.2% on October 1 to the current 14.4%. This reflects a decline of 6.8 percentage points in its implied volatility in the quarter. Usually, a fall in implied volatility shows that the markets are bullish on a stock. Implied volatility is an essential component of the option pricing model.

In addition to BP, its peers’ implied volatilities have also declined during the fourth quarter. Implied volatilities in ExxonMobil and Shell’s stocks have fallen by 6.2 and 5.7 percentage points, respectively.

Overall

The technical indicators suggest that BP stock could strengthen in the coming months. The narrowing gap between its DMAs shows its recovering technical position. Its RSI has not yet reached overbought territory. Plus, the decline in its implied volatility shows improving market sentiment toward the stock.

Although BP stock didn’t have a smooth year, it could witness a strong start to 2020. To learn more about the company’s earnings outlook, please read BP Could Benefit from Recovering Oil Prices in 2020.