CHK, OAS, SPY and The Possibility of New Highs for the Nasdaq

Just a quick note here on a few of the stocks/options that I have noted in recent weeks.

CHK and OAS report earnings 2/25/15 before the open.

The sentiment backdrop on CHK is showing considerable pessimism in that the near term put/call open interest is almost at an annual high and the short interest is at an annual high and has increased by almost 29 million shares since 12/1/14 at which time the closing price was similar to the current price level.  This seems like a scenario where the bearish backdrop could lead to considerable continued buying interest if prices push higher.  I am still holding an 18 strike April expiration call option on CHK with plans to hold through earnings.

On SPY where I had mentioned a call purchase on 1/28/15, price has moved to new all time highs.  There are bearish divergences present in several areas, but there are few extremes to suggest that the current move up is overdone.  When price moves to new highs in the stock market, often times price is able to advance steadily on low or declining volatility.  Given the apparent upside breakout of a large contracting triangle, it will be interesting to see if prices are able to sustain a major advance.

Click on Chart to Enlarge

The Nasdaq Composite is only about 5.5% away from a new all time high currently.  It seems likely to me that price will exceed that high before a major correction occurs.  An ideal scenario may be a rather directional move up from here to eclipse the tech bubble highs with a good bit of fanfare.  Then that may be followed by a correction, or at least a pullback several % below the highs to punish the breakout buyers.

Pete

OAS Short Covering Underway......And Likely to See Further Gains?

In a recent post on OAS I talked at some length about the recent accumulation of a large amount of short interest in the stock and gave an estimate of the average price at which that new short interest may have been accumulated.  I estimated that the 15.00 level or 34 day simple moving average may be a short squeeze trigger price.  This is the theoretical point at which the short interest becomes a net loss.  Any further gains from there really create a forced buying to cover situation on the short position and can lead to significant price advances, often times in explosive fashion.

So here is an update on the current chart of OAS.

Click on Chart to Enlarge

Notice that as price moved to the blue 34 day moving average yesterday we saw a large price move occur, creating a 15% gain or so yesterday.  Then today we saw another 15% move or so.  So part of the equation is that oil has rallied as I have recently suggested would be the case.  But why has the range expanded so much in the last couple days, and why is it outpacing oil gains so much?  Well I think that the short interest has a lot to do with that.

Currently price is now right at the 12/23/14 high which from a charting basis is a likely buy stop point for shorts.  So it may be hard to gauge how rapidly the short interest is being covered, but I think it is logical to assume that there will be more short covering as price breaks through that 17.75 high.

The stock traded huge volume today, way higher than any day in the last 2 years.  I think that also adds evidence of frantic short covering.  How long will it last?  I don't know.  There were 16.9 million shares sold short as of the new year.  The total volume traded the last two days is 37 million shares.  So a significant amount of the potential covering may be done, but I think between new potential buying interest as oil turns up and OAS breaks through chart resistance, and some further short covering potential, this stock may have a good ways to go before it makes a significant high and pause in the buying pressure.

I currently have an order to sell the current option I have on it as the stock price approaches $25.  The option I have is February expiration, $15 strike.  So I am hoping for some more rapid follow through here and a fill of the gap down from Nov 28th prior to Feb 20th expiration.

I may not update further on this one unless someone has a position in it.  But I thought the educational value of the underlying dynamics was of value to follow on an intra trade basis here.


Pete

OAS Call Option and Short Interest Analysis

Click on Chart to Enlarge

This daily chart is of OAS which is Oasis Petroleum, an oil correlated equity.  I have a order to purchase the February 15 strike call option.

According to data on Schaeffer's Research, there has been a near doubling in the amount of shares sold short from the Dec 1 to the Jan 1 reporting period.  As of the current data, there is over 24% of the float sold short.  This is obviously an indication of pessimism on the stock, which seems justifiable (and profitable over the last several months).  Nevertheless it does create a large potential supply of buying power in this stock if prices rally and put the shorts at a loss.

A bit of my logic on this is indicated on the chart above.  The light blue moving average is the simple average price since December 1st at which point 8.61 million shares were sold short.  As of January 1st 16.91 million shares were sold short.  So basically we have seen a huge increase in the number of shares shorted since December 1st.  And I don't know exactly were they were shorted, but just using the average price and assuming they were relatively evenly shorted during that period, then that would put the average price shorted at about 15.00 (or maybe 15.90 if using the high of each bar for the average).  So if prices rise above the 15.00 level, that would possibly put the average short position at a paper loss at that time.  And then any further rise will put those newly shorted shares at an even further loss, creating pressure to cover the position.  Covering is done by buying the shares, and so that would be significant buying interest forced into the stock.

Additionally, price this week did not even come close to making a new low for the decline despite oil's new low.  This again is a non-confirmation with the commodity that may be a sign of bottoming in the sector and relative future strength in this stock.  Furthermore, a move above the December 23rd high would be a stop loss point on the chart, and again, given the hefty short interest, may lead to a short covering burst of buying.  There is a large heavy volume unfilled gap down above that at 25.24.  If oil is bottoming here and going to stage even a bear market rally, that $25 level would be a likely target for OAS in my opinion for the coming weeks.

So my plan here is to buy the call with the expectation that we may see prices rally in the next 5 weeks and make a significant gain in the option.  If buying, a simple strategy could be to enter a limit order to sell half the position at 100% or 1/3 at 200% gain and then hold the rest assuming prices appear to be moving higher.  Then a more finely tuned final exit can be sought.

But the set-up here looks good for an equity purchase as well with the same overall trade logic.

If there are any follow up questions to this analysis or oil related issues, reply here and I will try to assist you.  I view this oversold oil sector and the XLE etf as a prime opportunity for profit at the current time.


Pete