Collect Big Profits if Teekay LNG Partners Pulls Back

Investors got too eager yesterday

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.

Demand for oil and LNG is what’s suffering because of COVID-19, and less demand means less need for TGP’s services.

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.

InvestorPlace advisor Ken Trester also brings you Power Options Weekly, which delivers 5 new options trades and his latest trading advice to you each Friday. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.

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