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Heavily Shorted Basic Energy Services (BAS) Finding A Second Wind

Jul. 06, 2013 6:07 PM ETBASXQ
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Here comes Basic Energy Services (BAS) again attempting to finally make a break to the upside. This stock can easily be described as one of the more disliked stocks listed on the NYSE, managing to maintain a short interest of at least five times its daily trading volume for most of the past year. Let's take a look to see if this current move higher could be sustained into the months ahead.

BAS made its final low in July of 2012, after a fierce, 11-month decline of over 65%. Since then, the traditional signs of a long term base appeared.

  1. Diminished volume when the stock tested its July low that following November
  2. A breakout above its September recovery high
  3. A strong RSI divergence on a weekly basis
BAS - A Bottom In The Making?

Then, after the stock nearly doubled, apparently everybody lost interest. The stock drifted again lower, aggravating both call option holders and short term traders alike. Now, however, nearly five months after the February peak, it looks like BAS is about to take another shot to the upside. In a similar pattern to its 2012 base, BAS made a positive RSI divergence and just broke above a key trendline last Friday (July 5th). See the chart below

Currently, the minimum target, given the width of this base and the current bullish patterns in oil prices, which should help oil stocks such as BAS, is around $15-$16. If the March high can be pushed through, then there may be another surge in the stock, such as in 2011.

So the strategy? This trade is still very timely, so buying now is still a low risk, high reward proposition. I would suggest entering a half position now, and the other half once the June high is pushed through, to limit overall risk. Given the stock's past tendency to move sideways after failed breakouts, I would not suggest utilizing options in this trade. However, for those looking to limit risk, a covered call strategy could prove beneficial. I'll be keeping an eye on this one and positing again as the stock gets more interesting.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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