June 10, 2010
Trend Trading BP
Here’s a look at BP on three different time frames. You can see that price has fallen about 40% since the Deepwater Horizon rig blew up. As I detailed in my Slow to Discount Disaster post, it took awhile for the market to understand the depth of the disaster (yes, a bad pun, sorry).
There are investors out there who think that BP is now undervalued, but traders can’t afford to be on the wrong side of the market. Lazy shoot-first-ask-later guys simply look at the chart and say, I need to find a spot to short this. Price has been falling so hard that even on the 120 minute time frame, there have been next to no countertrend moves to exploit.
So we have to drop down again, this time to the 30 minute chart, where we can find many good spots to enter over the last six weeks, each time risking around 4%. You don’t want to overthink things, just follow the trend, find places where you can define your initial risk in a smart way, and sell it.
UPDATE: BP opened below 350p in London.
Very Zen-like as if to embody the full spirit of a Daoist blogger…
June 10th, 2010 at 4:45 pm
Hi there Chairman MaoXian,
I’ll say the same thing as I said on ZeroHedge given that Jim Cramer has thrown in the towel, the last dumbass has left BP’s share registry.
I’ve had 10 (it was 9 before today) scalp longs in BP in the ‘beer money’ account, and 9 have been profitable (today’s – as outlined in that ZH comment and others in that thread – was a doozy).
Apart from the fact that BP is not going to die as a result of this (and therefore is VERY buyable as a yield play… ignore the noise emanating from the US parasite-political class: at worst BP will DEFER its next divvie), folks must also accept that US law SPECIFICALLY prevents damages awards that could put a company out of business (I learned that fact in 2001 after teh Philip Morris tobacco decision).
Also, technically there are CCI divergences on hourly, daily, and weekly timeframes (the CCI divergence is one of the best impending-counter-trend-bounce indicators known to man – it’s what got me long DAX at 4000 on Feb 22 2009, and then reverse to short at 6000 before a 500-point decline… and it’s what I use every day on 15-minute charts for S&P, DAX, ZB and SPI scalping).
This even – the ’spill’ – should be a case study for all those with an anti-government bent. First, lax oversight yields bad resutls. Second, politicians leap on any disaster to divert public attention. Third, they present a stupid and simplistic view (does BP have any insurance for a thing like this? Would it shock you to hear ‘Yes, of course’? Could BP keep it in litigation for long enough for inflation to pay half of the eventual cost? Are others (RIG, APC, HAL) partly responsible?). Fourth, it shows how capricious legal frameworks are – the US government is retroactively increasing the maximum ‘bill for the spill’ by a factor of about 500… that is knee-jerk legislating on a par with Zimbabwe.
Not saying htere’s more downside, but it would be a vindication of my “get on the opposite side to journalists and Cramer” if BP.L finished UP for the day (it opened down 11%, but when I last looked it was down under 6%… I took a 35% gain on margin and called it a day, as I also mentioned in that ZH comment thread)
Cheerio
GT
June 10th, 2010 at 5:32 pm
@GT: I’m sure there have been fine countertrend scalps for deft people to take these many weeks, but hasn’t it been an easier play to be on the short side?
I don’t know anything about BP’s long-term prospects, etc. I’m just saying it doesn’t pay to fight the tape.
June 10th, 2010 at 11:41 pm
Chairman you are just a dummy
June 11th, 2010 at 7:09 am
Hi again Chairman MaoXian,
You’re absolutely right – catching a falling knife can be hard work, and so long as one’s entries are sensible the short play was much easier in this instance. For example, bounces to %R overbought on hourlies or 15-minute charts work nicely to get secondary entries for a missed short entry in a murderous downtrend like this [or like EURUSD]. But this far down, the risk is that there is a single piece of GOOD news.
The problem is that most people don’t enter sensibly (or exit sensibly) – they will sell or short BP (sell CFDs, buy puts or whatever) closer to the END of this decline than the beginning. And they will buy a 10% bounce… you can see the dumb-investors/breakout-traders in the volume: volume spikes at highs and lows as money goes from dummis to smart hands.
In other words, this has gone past the point of a trend-following trade for a downtrend, and is now in the “downside breakout” scheme of things – the easy money on the short side was made well before the failed top kill and the downtrend is very very stale (it now relies on rumours about Ch11 which are absurd… anyone who knows anything about what happend post “Exxon Valdez” will understand why the risk to BP balance sheet is negligible).
It must be said – I don’t do much single-stock direct equities investing or trading, on the basis that it’s too prone to event-driven downside: investing-wise I build highly value-driven portfolios, and trading-wise I trade index futures, bonds and commodities on a scalp or swing basis (trying always to avoid the failed scalp that becomes a swing trade due to obstinacy!)
@Soulek1… you’re naughty.
Cheers
GT
June 11th, 2010 at 8:49 am
the price and volume are good enough to me, all indicators are simply distraction. I look at the chart, it was gaining momentum on each leg down. you must have a deep pocket to long this thing. to buy scalp? hmmm
June 11th, 2010 at 9:45 am
@GT: Soulek is referring to my widely read (at least a dozen have read it) Lessons for Dummies.
Yes, I agree after falling nearly 50% in six weeks it’s mighty stretched and prone to snap-backs, but I’d still favor the short side from a short-term trading perspective.
If you can send me an annotated intraday chart showing me your entries and exits, I’d be happy to look at them.
June 11th, 2010 at 1:01 pm
There is some good money to be made on horror stories, neg news, controversy…recently: GOOG/BIDU MEE GS BP WAG/CVS.
June 11th, 2010 at 1:42 pm
@BL: Can you be more specific? Share entries and exits?
June 12th, 2010 at 4:53 am
No. Just an obervation over the past 6 months: mee with the mine disaster, goog out of china, gs with the sec, bp in gulf, wag/cvs prescription cancels. Negative news has a good risk/reward in shorting the stock as per bp above. Just something to keep in mind when one read about disasters and such.
June 12th, 2010 at 9:41 am
@BL: Ah, I see what you’re saying, but the devil is in the details (risk/reward, etc.)