Shares of oil and natural gas producer Chesapeake Energy (CHK) surged Thursday after the company announced that it sold shale assets worth $5.375 billion to independent energy company Southwestern Energy (SWN). The day’s rally in CHK stock also was technically significant as the breakaway-gap move now looks to be able to sustain the stock higher — something that active traders and investors could take advantage of.
Specifically, Chesapeake Energy sold all of its assets in the southern Marcellus Shale and part of the eastern Utica Shale in West Virginia to Southwestern Energy. It is worth noting that the transaction still is subject to some third-party consents, but that didn’t seem to matter much Thursday. Judging by the price action in CHK stock, the $5 billion-plus price tag seemed to surprise investors, who were giddy to chase the stock higher by 17%.
The dramatic selling in the price of oil (and by extension, in energy stocks in general) during the past few months also wasn’t kind to shares of Chesapeake Energy. I often say that the biggest risk in the stock market is the notoriously high correlation among stocks, particularly in times when volatility spikes, and the past few weeks of selling in energy stocks is a great example of this.
However, when the rubber band gets stretched too far through a technical lens, the snap-back moves are often violent, providing opportunity for more active investors.
CHK Stock Charts
Looking at Chesapeake’s multiyear weekly chart, note that the recent selloff took CHK stock down to its late 2008 support line. With the Relative Strength Index (RSI) at the bottom of the chart in similarly deep oversold readings as in November 2008 and May 2012, an oversold bounce (at the very least) looks to be in order.
After falling nearly 40% since marking a higher low in early September, CHK stock finally exhausted itself, along with the broader energy sector on the downside on Wednesday. Momentum oscillators have been deeply oversold for several weeks as volume increased on the selloff, which it should. More importantly, however, Thursday’s volume of nearly 38.75 million shares much surpassed the volume of any day in recent weeks. The stock opened Thursday trading higher by 10% and never looked back, closing the day near its highs.
The setup for active investors and traders is rather straightforward with clearly defined risk. If CHK stock can push past its Thursday intraday highs near $21 (this is a must for the trade to be valid), then a follow-through buying trade sets up with a next upside target near $22.75, which is the previous support area (red dotted line), and now possibly resistance. Traders can use any break below Thursday’s lows as a stop.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
