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.

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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

CHK Ascending Triangle Ready to Breakout

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Since I have made some recent posts mentioning CHK and suggesting it may be set for a nice move up if oil continues to rally, I am going to make another follow up here on it.

Currently there are a couple interesting points of note on the chart.  The first is the double bottom between October and December.  And now the action since then has formed an objectively ascending triangle with a horizontal resistance line at 20.35ish and an up sloping support line from the December and January lows.  Price has moved right back up to the resistance line today.  This price level will be the potential breakout of the pattern.  Additionally, one of my posts on CHK mentioned the short interest pattern in the stock and highlighted that December 23rd high as a probable short covering trigger point if price moves higher.

A short covering rally tends to be very directional and so it can be a nice move to participate in.  There are 3 points on the chart that I would suggest as partial profit taking areas or potential price targets.

The first is the unfilled gap down at 23.04.

Then the other two are at essentially the same level at roughly 25.25.

• The first is the projection up from the symmetrical triangle taking the widest leg of the triangle and projecting it up from the resistance/breakout point.  
• The second projection is the green line on the chart showing an equal price move to the Oct-Nov advance projected up from the Jan low.  Since this stock has the potential from a pattern standpoint to be right in the middle of a strong new uptrend, I think that it is likely to make a larger move from here than any rally in the downtrend.  

Again, I have April 18 strike calls here personally, but a close above the 20.38 level, would be reasonable cause in my opinion to expect that stock to quickly move up to 23.00 or higher.

Pete

What to Expect From Here in Oil Prices

I have made several posts recently regarding oil and energy prices and some individual stocks in those industries.  The reason for this is the extreme position of crude oil and the potential profit that can be made on a turn up in oil.  It is not every day or week or month or year that major markets experience the type of dramatic re-valuation in prices.

Based upon history we know that the greater the bear market, the greater percentage gains we expect to make in bull markets, and the more violent the initial thrusts off the low tend to be.  So I am personally looking to catch a shorter term thrust up in the coming days or weeks.  Then my expectation is that we are likely to see a major bottom or bear market low occur within the next couple months.

I have gone back through the history of crude oil prices and made some observation regarding major bottoming processes.  Here is a quick summary of what I believe is important:

• The winter (Nov-February) has seen some of the most significant bottoms in history
• There was often a violent rally lasting a week or a few weeks off of the momentum low (low in indicators) which was followed by a modest break to a new final low within 1-2 months later

Given the current position of oil prices is believe we are very near the beginning of the expected violent rally off the momentum low.  Then I would anticipate a retest and or break to new lows over the next several weeks, with February or March being the expected months to bottom.

I have also suggested that looking at energy equities that are not confirming moves to new lows in oil may be the best speculative opportunities at this point.

I recently posted about CHK and it continues to look like it is just resting below a short-covering breakout point which may produce very nice short term burst higher if oil does indeed strengthen even for a week or two.

If you have questions about how to navigate oil and related issues currently, reply or comment and I will try to assist you.

CHK Option Trade

Click on Chart to Enlarge

I purchased a call option position on CHK today for 2.48 April 18 strike call.

CHK is an energy related stock, which is in the oil industry which obviously has been hammered down in price recently.

However, there are some signs that the oil downtrend may be near exhaustion, and that CHK may be one of the sector that is showing relative strength on the charts.

Notice that oil has been making new lows into this week.  However, CHK bottomed with a double bottom reversal on 12/12/14.  Now on oils push to new lows, CHK has held well above the the 12/12/14 low.  This creates a non-confirmation with the underlying commodity and is a sign that CHK is basing and ready for a move higher.

A subtle note on short interest is that during this downtrend, the short interest has consistently risen as CHK has rallied and then declined as price declined.  The same pattern did happen again as price rallied in CHK into late December.  HOWEVER, now that price has declined but did not make a new low, and there is the real possibility of a break above the December highs if oil strengthens, then it seems likely to me that there would be some short covering forced on a break of that price peak around 20.40 on CHK.

For stocks one could be long with a stop below this week's low, and then exit at a limit of 23.04, which is the fill of a large gap down.  That would be a solid reward/risk play, and one with a clear logic behind it.  I am in the call option with plenty of time for a significant move and, in my estimation, a very good probability that this option will at least double in price at some time prior to expiration.  The key will be to make a timely exit or scale out if prices do rise.


Let me know if there are other oil related issue that you would like looked at.

Pete