Trade of the Day: CHK Stock Headed for a 25% Drop

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Chesapeake Energy Corporation (CHK) — CHK stock has more than doubled since hitting a low of $1.50 on Feb. 8, its lowest level in more than 15 years. The rebound was spurred by rising crude oil prices and Chesapeake’s Q4 earnings beat. However, concerns remain about the highly leveraged company’s ability to repay its debt as oil remains at depressed levels. So the recent rally in CHK stock looks like a good opportunity for short sellers to profit again.

Chesapeake is one of the largest independent exploration and production companies in the United States and focuses on onshore oil and gas production.

S&P Capital IQ Equity Research has a 12-month price target of $3 on CHK stock. Its analysts rate shares a “Hold” but note that they are high risk, due in part to Chesapeake’s aggressive financial strategy as an active acquirer in exploration and production.

Capital IQ estimates losses will widen from 20 cents per share last year to 75 cents this year, and they expect a loss of 19 cents per share in 2017.

Turning to the chart, CHK stock broke through a near-term trendline and its 50-day moving average. It then jumped to its bearish resistance line on what appeared to be a short-covering rally and formed a descending triangle with support at about $4. This pattern usually breaks to the downside, especially when formed by short covering.

According to data from The Wall Street Journal, the number of Chesapeake’s shares held short declined by 2% between Feb. 29 and March 15. However, CHK stock is still the third most heavily shorted stock on the NYSE. And recent declining volume is conducive to a breakdown.

CHK stock appears to be a good candidate for a short sale at $4 with a target of $3 for a potential gain of 25%.

CHK Stock Chart
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Article printed from InvestorPlace Media, https://investorplace.com/2016/03/chesapeake-energy-corporation-chk-stock-trade-of-the-day/.

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