Trade of the Day: Take the Contrarian Side on Chesapeake Energy Corporation (CHK)

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Editor’s Note: Due to technical issues, Sam was unable to provide today’s Trade of the Day. Serge Berger is filling in for today.

Shares of energy company Chesapeake Energy Corporation (NYSE:CHK) have looked as ugly as other energy stocks over the past 12 months. The rising dollar and general commodity slump is deflationary in nature, and over the past few days, these have led to another round of selling in energy stocks.

The selling in particular for CHK stock, however, looks increasingly overdone and could lead to a sharp mean-reversion bounce higher that active investors could play.

To be clear, I am not one to get all excited just because a stock is in a precipitous downward spiral. But when such a spiral coincides with a longer-term break of technical support, then yes, I’ll perk up and take notice.

The most recent flush in CHK stock over the past two days came after Chesapeake said it is suspending its dividend, saving the company around $240 million per year. Now that CHK isn’t providing any income, many investors have decided to jump ship.

Looking at the multiyear picture, we see that CHK stock in June broke below support that dates back to the 2009 lows. This isn’t bullish by any measure, but the contrarian in me can’t help but notice when a stock breaks below support and steepens its decline. This often smells of exhaustion selling, and the phrase “it’s always darkest before the dawn” springs to mind.

The weekly oscillators have again reached oversold levels last seen during better rallies in late 2008 and May 2012. The proverbial spring does look to be loading up here as investor sentiment is also reaching new lows for energy stocks and oil. Again, the contrarian views this as a bullish sign — at least for a mean-reversion snap-back type of trade.

Chesapeake Energy (CHK) weekly stock chart
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Moving on to the daily chart, note that the selling since May has now matched the down-leg from February into March. Furthermore, note that positive divergence between price and momentum is beginning to emerge, which is a positive sign for the odds of a bounce-back (at least).

Chesapeake Energy (CHK) daily stock chart
Click to Enlarge

To be clear, this is not a call to blindly buy into CHK stock, but rather a notice to investors to be on the watch for the next bullish reversal or selling exhaustion candle, which in turn could set up a nice trade into the low teens.

Successful trading and investing starts with a plan. Download Serge’s essential trading plan, The Essence of Swing Trading e-book. As of this writing, he did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/07/trade-of-the-day-chesapeake-energy-corporation-chk/.

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