Gastar Exploration: Coming to Life and Getting Stronger

Includes: AMRN, GST
by: Michael Kudrna

Gastar Exploration (NYSEMKT:GST) is a small-cap natural gas stock in the highly popular Marcellus Shale and is currently flying under the radar of most. Due to its recent litigation, those who did come across a promising GST tossed it aside very quickly. The stock price continued to stay under pressure as most liquidated their shares. But the stock has recently come to life and the technicals are only growing stronger.

The litigation is finally over and unfortunately, GST paid a hefty price to settle. The roughly $21 million settlement is weighing on the financials, but the future looks promising if you are bullish on natural gas as the next hot energy sector. GST owns approximately 40k acres in Marcellus Shale, which is the place to be these days, and has some lesser discussed land as well. Now that the litigation is over, GST can look to expand its portfolio. GST has great potential in the short-term if natural gas does indeed find itself in a bull market. But the fundamentals need to catch up sooner than later for GST to truly unlock its value.

What excites me most in the short-term about this speculative natural gas stock is the current chart setup. GST has found bullish accumulation over the past few months as the stock bottomed out. It recently formed two cup and handle patterns and has also formed a modified W-pattern with confirmation on the recent breakout when it ran past the top of the first V-shape in the W-pattern. This creates higher highs and higher lows in the stock price, always a bullish sign. Currently, it is above the key support level of $4.50 and in an accumulation phase after the breakout. The volume on green days has significantly outweighed the low volume on red days, indicating the bulls are still holding their shares and looking for more upside. This can be seen in the strong uptrend on the A/D and OBV lines as well as the positive trend in the CMF indicator.

Click to enlarge

If GST stays above the key support area of $4.50, look for some back and forth filling as the bulls accumulate more shares, until it breaks past the next resistance level around $5. Since the markets are feeling toppy at the moment, I will keep my stop-loss just under the key support area to ensure I don’t lose my current profits. If the bulls can break resistance on strong volume, I’ll look to aggressively add more shares and trade around a core position, meaning I will right-size my position once the bulls start to slow down.

As always, do your own homework to see if you agree. Take note that GST has many low volume days that can create extra volatility. This can frustrate many and can create false technical readings. So if you see a very low volume day, don’t overanalyze it. With that being said, If the stock drops on very low volume, I would not be too concerned but, depending on your risk tolerance, you may still want to honor any stops you have.

Disclosure: Long GST and AMRN but positions may change at anytime.

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