You can’t call Chesapeake Energy Corporation (NYSE:CHK) cheap without the word speculative being used in the same sentence. I get it. Still, for contrarian investors off and on the price chart, CHK stock is making the right moves worthy of a long position … with possibly a string or two attached. Let me explain.
It has been nearly two years since I last wrote about debt-saddled energy play CHK stock. At the time, since I was more than a bit concerned about Chesapeake’s prospects, I offered bearish investors a way to position for downside in shares with reduced and limited-risk using Chesapeake’s options market.
The bearish CHK stock spread ballooned from 25 cents to 96 cents for a return of 284% in less than two months. Nice, right?
I can’t guarantee the same type of result in today’s market. Nevertheless, the time has arrived for contrarian-oriented investors to consider gaining long exposure in CHK stock and maybe inflicting similar damage to bears overstaying their welcome.
No doubt, Chesapeake Energy still has a load of debt to deal with. But it has been making serious strides in the right direction with those obligations.
Additionally, CHK’s most recent corporate confessional in late February offered solid growth, topped the Street’s profit and sales views and raised guidance, moving the company closer to being free-cash-flow positive. And importantly, Chesapeake Energy stock is enjoying a supportive price chart that’s now offering today’s investors a lower-risk entry, but one with a string or two attached.
Well … maybe.
CHK Stock Monthly Chart
There are no guarantees with investing in the stock market other than the opening and closing bells. But CHK stock has confirmed a good-looking bottoming pattern, which has the earmarks of turning into a durable bullish uptrend.
As the detailed monthly chart shows, Chesapeake shares have put together a double bottom which took three years to form. The formation received upside confirmation in the immediate aftermath of CHK’s earnings reaction and enjoyed the added benefit of a bullishly divergent stochastics set-up.
Now and as the daily chart below reveals, CHK stock is offering investors an even-lower-risk, technical-based entry in shares.
CHK Stock Daily Chart
The same price action which confirmed the monthly chart bottom in CHK stock also had the effect of establishing a higher-high pattern followed by a higher low on the daily price chart. In turn, an uptrend supporting the bottom in Chesapeake stock has developed.
Now, several sessions after forging another higher high to solidify Chesapeake’s new trend, shares are pulling back and offering intrepid investors a lower-risk entry point.
Buying CHK Stock
What I’m expecting is for CHK stock’s next higher low within the uptrend to form. Once it does, investors should buy shares upon price confirmation that a new pivot is in place. This caveat means any low which develops must remain above the early March pivot, which is now also reinforced by the 50% retracement level. And if support subsequently fails to hold, I’d pull the plug on the position and exit.
Bottom line, with just 28 cents of risk between Thursday’s close and the March low of $2.63, this entry is not so much about a string or strings being attached. Rather, it’s more like a smart lifeline for contrarian investors in a good-looking speculative name.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional options-based strategies, related musings or to ask a question, you can find and follow Chris on Twitter @Options_CAT and StockTwits.