TAKING STOCK:BP Shares Still Haven't Priced In Enough Bad News

By Tomi Kilgore Of DOW JONES NEWSWIRES Wall Street traders tend to see stabilization in the face of bad news as a sign that a stock may be bottoming. That might make some believe BP PLC's U.S.-listed shares (BP) have priced in all the bad news, and are getting ready for a rally, but the shares have actually been behaving like another tumble is more likely. The U.K. oil firm has endured a beating over the last week. The company's credit faced a six-notch downgrade to just above junk status by Fitch Ratings and as BP agreed to the U.S. government's demands. But BP's shares have gained 3% over the last three days, and are now up 8.2% since June 9, when they plunged 16% on nearly triple the average daily volume to close at a 14-year low amid fears of a dividend cut. The recent strength might make the June 9 tumble look like the final straw for bulls that had been holding out for a bounce. But capitulation selling tends to be followed by a sharp snap back rally, as short sellers cover positions because they no longer see the follow-through selling they have grown accustomed to. And that has not been the case for BP. Since June 9, the stock has traded inside that day's trading range of $29 to $34.45, except for a one-penny peak above the top of that range on June 11. And despite the apparent resilience, the stock was at $31.60 in afternoon trading Thursday, well below the June 9 high. The lack of any significant bounce means not all longs have given up, or that there weren't that many shorts, or both. Keep in mind that short interest in BP shares dropped by nearly a third from the end of April to the end of May, from 9.7 million shares to 6.6 million, while the stock slid 18%. Rather than get more bearish as the bad news started getting worse, bears used the opportunity to unwind short positions. Meanwhile, the momentum technical indicator, which reads the strength of a trend by measuring the relative change in closing prices, has been rising off an oversold extreme seen earlier in the month. But momentum's disproportionate rise relative to the gains seen in the stock -- momentum reached the highest level seen since June 3 while the stock is still 20% below that day's close -- means the "oversold condition" is rapidly being worked off while the stock stabilizes. That does not bode well for those looking to sell on rallies. Resistance starts below the June 9 high, at the gap in the charts between the June 14 high of $32.60 and the June 11 low of $33.25. Even if the June 9 high can be hurdled, there is more gap resistance between the June 8 high of $36.12 and the June 7 low of $36.65. It's hard to say how far the stock could fall if the June 9 low gives way, but perhaps congestion at the $19 to $21 range from October 1994 to April 1995 can provide some support. (Tomi Kilgore writes Taking Stock, a global column that gives insightful analysis about equity-related topics around the world. He can be reached 212-416-2470 or by email at tomi.kilgore@dowjones.com.) (TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at TalkbackAmericas@dowjones.com. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments.) (END) Dow Jones Newswires June 18, 2010 07:35 ET (11:35 GMT)