With all the concern over the COVID-19 outbreak, I am recommending a bearish put option on Teekay LNG Partners L.P. (NYSE:TGP), the liquefied natural gas (LNG), liquefied petroleum gas (LPG) and crude oil transporter.
My indicators are giving strong bearish readings, as you might expect. They are flashing the most oversold readings I have seen at any time in the last two years, which shows just how much panic there is in the market right now.
If you take a look at the chart below, you can see that this selloff has pushed the S&P 500’s relative strength index (RSI) — pictured at the bottom of the chart — well into oversold territory.
Daily Chart of S&P 500 Index (SPX) — Chart Source: TradingView
Traders often use indicators such as the RSI to determine whether a stock or index is in “overbought” or “oversold” territory. Typically, an RSI reading above 70 tells traders that an asset is overbought, or overvalued, while a reading below 30 tells traders that an asset is oversold, or undervalued.
As of yesterday’s close, the RSI is showing an extremely oversold reading of 20. This does indicate that we may be close to a short-term bottom. But given the unique situation we are in, I don’t think it’s safe to turn bullish just yet.
TGP is in a unique position because it rose sharply yesterday, but I think the move higher was overdone.
TGP’s Earnings Beat
Before the market opened yesterday, TGP reported earnings for the fourth quarter of 2019, and its adjusted earnings per share met expectations of $0.56. The stock rose by nearly 16% on the positive news.
Oil and LNG prices may be dropping, but TGP is just a transporter, right? They’re business doesn’t necessarily depend on the prices of the commodities it transports.
That may be the logic behind pushing the stock higher on positive earnings news, but it doesn’t hold up to scrutiny.
I don’t necessarily believe a full reversal of TGP’s rally is warranted — the company did meet earnings expectations for a quarter where demand was already low — but I do think it’s premature.
TGP Still Needs to Overcome Resistance
If you look at the chart below, you can see just how dramatic TGP’s rally looks. The stock pushed right past potential resistance at its old support levels. But it couldn’t overcome resistance in the $13.50-$13.75 range.
Daily Chart of Teekay LNG Partners L.P. (TGP) — Chart Source: TradingView
TGP closed at another resistance level — this one around $13.25 — and based on futures trading this morning, it doesn’t look like the broader market is ready for a bounce higher yet.
I think TGP will pull back as investors realize the stock was pushed too far, too fast. If traders buy a put with a strike price at $12.50, the stock doesn’t have to fall far before we’re in the money.
Buy to open the Teekay LNG Partners L.P. (TGP) April 17th $12.50 Puts (TGP200417P00012500) at $0.70 or lower.
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