News that Chesapeake Energy Corporation (CHK) was able to secure its credit lines through June 2017 has investors in the buying mood today, with declining rig counts causing defaults and burn rates to top the list of concerns.
Chesapeake shares jumped out of bed to move up to 15% higher in trading Monday morning, leaving the question “is there more room to go higher?”
The long-term chart for CHK is a nightmare, as it is 94% lower than its 2008 highs and 74% lower than it was trading just a year ago. The low prices have even the staunchest of value investors shying away as volatility in the crude oil market is not likely to subside during 2016.
With the value traders likely to sit on the sidelines the market’s left to the technical traders, who may have a field day with the recent moves.
After breaking as high as $5.76 in March, Chesapeake stock has been in a consolidation phase that built a short-term tradable bottom at the $3.50 level. This support was recently confirmed last week as the stock maintained its price just above this level. Also playing a supporting role at $3.50 is Chesapeake stock’s 50-day moving average, a favorite trendline of traders.
The support at $3.50 and break above the shorter 20-day trendline opens Chesapeake stock up for a rally to the $5.50 to $6 range, which may not seem like much due to the low dollar price but represents a whopping 40% move!
The short interest ratio on Chesapeake stock is relatively low at 2.7, but short interest on the stock is coming off of some of its highest readings for the last two years. Bottom line is that we don’t expect to see too much short covering driving prices higher, but the technical break higher should be enough fuel for short-term traders.
Don’t expect the analyst community to start upgrading Chesapeake or its peers, so the longer-term trade prospects remain hazy, but short-term traders may have an opportunity to cash in on the change in trend in Chesapeake stock.
Traders should target $5 as a target, with $5.50 as a stretch target. On the downside, a break back below $3.50 would serve as a warning sign for another step lower.
Trade CHK carefully.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.
