Ignore the Chesapeake Energy Corporation (CHK) “Death Cross” … For Now

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Despite much talk about OPEC production cuts and stabilizing energy supplies around the globe, the energy sector rally that many on Wall Street anticipated has yet to materialize. This has been awful news for companies like Chesapeake Energy Corporation (NYSE:CHK). In fact, CHK stock has fallen more than 32% since early December, forcing the shares to test key support at $5.

CHK stock chart view 1
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But all is not lost for Chesapeake Energy bulls, and an opportunity may be in the cards.

The Death Cross (And the Rest of the Chart)

Now, you’re likely to hear quite a bit in the next few days about the “death cross” of CHK’s 50- and 200-day moving averages. This technical formation is often considered a harbinger of weak intermediate-term price action.

But while it might yet have some impact on CHK stock, there is plenty of room for the stock to run before the situation turns sour.

For instance, Chesapeake Energy recently set a double bottom in the $5 region, as support in the area grows increasingly firm. What’s more, the shares’ 10- and 20-day moving averages are in the midst of a bullish cross — another technical formation that indicates short-term buying strength.

Weighing the technical factors together, CHK should be able to run at least as high as $6 before encountering its 50-day moving average. And if the shares have built up enough momentum by the time this confrontations occurs, it could give Chesapeake Energy the buying power it needs to overcome this hurdle.

Sentiment and Options

Turning toward the sentiment front, we find considerable room for improvement. For instance, Thomson/First Call reports that only six of the 35 analysts following Chesapeake stock rate it a “buy” or better. Meanwhile, the 12-month price target rests at $7.30, implying almost 41% upside for the shares over the long-term.

In other words, if CHK stock can make some headway toward this target, we could see an upgrade or two provide additional lift for the shares.

Short interest could also play a role in a Chesapeake Energy rebound. As of the most recent reporting period, the number of shares sold short stood at 134.6 million, or 15.4% of the stock’s total float. That said, CHK may need to top $6 before any of these short-sellers rush to buy back their bets.

Judging from the options backdrop, many of these short sellers might be worried about a short-squeeze situation over the short-term.

Currently, CHK’s April put/call open interest ratio stands at 0.23, with calls more than quadrupling puts among options set to expire within the next month. Overall, April implieds are pricing in a potential move of about 7% for CHK stock over the next month.

This places the upper bound at $5.62, while the lower bound lies at $4.88.

2 Trades for CHK Stock

Call Spread: Traders looking to take advantage of a short-term rebound for Chesapeake might want to consider an April $5.50/$6 bull call spread.

At last check, this spread was offered at 12 cents, or $12 per pair of contracts. Breakeven lies at $5.62, while a maximum profit of 38 cents, or $38 per pair of contracts, is possible if CHK closes at or above $6 when April options expire.

Put Sell: Alternately, if you’re looking for a more conservative play on CHK stock, an April $5 put sell has a good chance at finishing out of the money.

At last check, this option was bid at 17 cents, or $17 per contract. As usual with a put sell, you keep the premium as long as Chesapeake closes above $5 when April options expire. On the downside, if shares trade below $5 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $5 per share.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/ignore-chesapeake-energy-corporation-chk-stock-death-cross/.

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