Chesapeake Energy (NYSE:CHK) stock is but a sliver of what it was in its heyday. In 2008 it peaked at $70 per share. It is almost a penny stock today. So from an investment perspective, clearly any bullish trade here would be a speculative one. The bet is that the company will survive and CHK stock will show some signs of life.
It has been setting a series of lower highs and lower lows for a while, seeming unable to find a bottom. It did look like it would hold a bit under $2 per share, but even that eventually failed. Assuming that Chesapeake is now on the upswing, every prior floor will now become forward resistance. So if yesterday’s rally sustains itself, I expect they could find resistance at 60 cents per share, and then again 10 cents higher.
Eventually shares will have to face the $1 mark, which also would be a tough line to cross.
But this is like putting the cart before the horse. CHK stock must stabilize before it even makes a comeback. So the underlying assumption that it has indeed bottomed. If that turns out to be true, then the next thing to look for is a series of higher lows.
What the bulls need to look for is the formation of a trough before one can expect a recovery rally. This can even happen while it continues to make lower highs. The battle between the bulls and the bears then become this new upside momentum versus the lower-high trend lines.
The Trend Is Not the Friend of Chesapeake — Yet
When a trend is this bad for this long, any bump in price remains suspect. So at best, yesterday’s move could be the start of a trough in Chesapeake stock. But that could have been said in June, October and November of last year. Let this serve as a reminder that the recovery rally falls under the umbrella of speculative trades. It is hard to make a fundamental argument for a stock that behaves this badly. As they say, price is truth and it is screaming for caution.
The charts tell a horror story, so any money risked in upside bets on CHK is a lottery ticket. Meaning it shouldn’t be an amount that can break the investor’s hearts or their piggy banks. Otherwise it becomes a conviction trade, which Chesapeake is not worth here. Even the so-called experts in the field should remain very humble with their assumptions. Generally, it’s not a good idea to fight the trend on Wall Street — and this one is clear as day.
To make matters worse for the Chesapeake bulls, the concept of fossil fuels are suffering through horrid sentiment right now. The rhetoric and the media are completely against it, and pursuing renewable energy is all the rage. This has always been the goal, but now it’s in the headlines — more so than before.
This adds more downside pressure on all energy stocks, even the behemoths like Exxon (NYSE:XOM). The price of crude oil can’t hold rallies either. This makes a potential recovery in CHK stock even more difficult.
The Earnings Wild Card Is Looming
In addition, Chesapeake’s earnings report is coming up, and that too adds a coin flip aspect to near-term prices.
It is always the case that the immediate reaction to the reports are binary. Chesapeake stock is so cheap that it gives the impression that the losses cannot be large. While that may be true in the absolute sense, the trade risk is still 100%, and that’s the same result on 50 cents stock or $500. Investors’ goals are never to lose money and it’s easy to get a false sense of security and over-commit when the price is so close to zero.
Regular risk controls should be in effect here too.