Chesapeake Is Breaking Out! Going To $10

| About: Chesapeake Energy (CHK)

Summary

OPEC agrees to a cut of 1.2M barrels.

Chesapeake is poised to benefit from higher natural gas prices.

CEO doing a fantastic job repairing balance sheet.

What a difference a day makes! Yesterday the talk of the town was OPEC was not going to come to an agreement on production cuts. Oil was trading off up to 4% as both CNBC and Bloomberg had analyst come on set renewing bearish calls with some saying oil would trade back into the $20s.

Oil stocks sold off trapping emboldened shorts, twelve hours later and an agreement to cut 1.2M barrels a day. While the agreement means next to nothing, it has a psychological effect that is powerful.

Investors woke up this morning to oil trading up 7% from down nearly 4% yesterday. That is an 11% swing and a boon to US shale drillers. Chesapeake Energy (NYSE:CHK) is my favorite beta play as I now believe the stock will see the $10 range if this trend continues.

Is today a sell the news event?

That is the billion dollar question that all investors want to know. My simple answer is it depends on the stock. In the case of Chesapeake Energy, I say no. Yesterday's open was a good time to buy in the low $6 range as that may have marked the bottom of the next leg up in the rally.

It is important for investors to realize that Chesapeake went through one of the worst shakeouts imaginable in the oil patch with the stock collapsing from $20 just 18 months ago to $1.57 on February 12th of last year.

I was one of the only people on the planet screaming for investors to buy back in February when the stock was $2.12. Interested investors can view that article here.

A look at the charts

Today I am going to show you two charts for a little more perspective. The first is a 5 year weekly.

Click to enlarge

Investors can see in the weekly chart above the break at the $13 level that marked a steep downtrend to the final capitulation on a false Bankruptcy rumor in February.

CEO makes bold moves to turn the company around

Chesapeake was in serious trouble with loan covenants and massive debt that was threatening to wipe out shareholders.

CEO Robert Lawler launched a debt buyback in December 2015 when the bonds were trading for pennies on the dollar and it worked out quite well. The company retired billions of debt and sold off assets giving the company more time to straighten out its balance sheets.

IF you believe as I do that oil demand will continue to build as the US unleashes massive stimulus and the world continues to grow then you can see the potential upward path for Chesapeake energy.

A look at this shorter term 60 minute intraday chart.

Click to enlarge

The chart above goes back to August when the stock traded under $5, that was a great short term buying opportunity that yielded investors a fantastic 80% return.

Investors got another opportunity right after the election as Chesapeake sold off to the $5.25 which in my view was a gift. I bought it there and sold it on the run up to $6.75. I wanted to wait to see how the OPEC meeting shook out and missed the opportunity yesterday to buy under $6.10; a classic mistake on my part as I hoped to pick it up at the gap at the $5.50 level. That was my ideal entry point that investors may never see again.

This stock could quickly squeeze short interest to cover in the $8 range and then go long, I see a quick powerful rally to $10 and beyond. Stocks have memories and I believe this one will soon remember the $13 level.

Here is my thoughts on the Icahn sale

Carl Icahn likely sold that rally to $8 as the stock needed to retrace a bit. As a whale trader you must cash in on giant 400% rallies from the bottom and use them for your benefit. Keep in mind he may have not made any money in that trade as he was buried in the stock at the $14 level. He likely traded out of the position and may at this moment be reinvested in the stock. I guess investors will find out on the next filing.

In my opinion charts are so important to pick good entry positions and gain an understanding of the emotions in the mind of traders.

I now see a turning point for oil as the nations of the world have a vested interest to see oil trade in the $50 to $65 range for the next year. This is good for everyone and while they may not stick to the production outputs it is the perception that matters. In the markets: perception is reality.

Conclusion

Chesapeake Energy is a strong buy on any weakness. I like it here although there may be another quick shakeout on an unforeseen event.

The CEO has done a fantastic job navigating the company through the most difficult oil debacle imaginable. Chesapeake is now cash flow positive and the comparables will be favorable going forward.

The pull back from the $8 level in September to the low $5 range offered investors a great chance to get back in the stock and current developments set this up for a multi-year run back into the teens.

The rally in natural gas and oil combine to make Chesapeake Energy a winner in the coming year. I believe the company will turn profitable in the very near future and be a Wall Street darling once again.

As always do your own research and know your exit point before making any trade.

Disclosure: I am/we are long CHK LYG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.