Has Chesapeake Finally Transitioned To A Long-Term Uptrend?

By: Wayne Duggan

Chesapeake Energy Corporation (NYSE: CHK) was one of the three worst-performing stocks in the entire S&P 500 in 2015. However, so far 2016 has proved a much different story for Chesapeake traders. The stock is now up 41.1% year-to-date, and is showing technical signs of longer-term strength as well.

The Inverse Head and Shoulders

In the past several months, Chesapeake appears to have formed one of the classic technical bottoming formations in its chart: the Inverse Head and Shoulders pattern. This pattern could be a sign that the stock’s 2016 gains are more than just temporary and could be the beginning of a longer-term uptrend for the stock.

Chesapeake seems to have completed the formation when the stock bounced off of the $3.50 level in early April, forming the right shoulder at nearly the exact same level as the left shoulder was formed back in December.

Trend transition?

The April dip to $3.50 represents a major “higher low” for Chesapeake, which plummeted as low as $1.50 back in February. Since then, the stock has established a pair of higher lows and two higher highs (March’s surge to $5.76 and April’s push to $7.59) as well. The transition from lower lows and lower highs to higher lows and higher highs is often an indication that a stock’s long-term trend has changed from bearish to bullish.

In addition to the Inverse Head and Shoulders pattern, both of Chesapeake’s violent spikes so far this year have come on massive buying volume, a sign that some heavy-hitters may be piling into the stock. That type of buying volume is unprecedented for Chesapeake in the history of the company.

Support/Resistance

In terms of major support, the only two levels below $6 that could provide support are the $3.50 level and the $1.50 level. Both of those levels represent significant downside, and a breakdown below $3.50 would mean that the Inverse Head and Shoulders is no longer in play.

The first resistance line will likely be the $7.59 2016 high that Chesapeake established just weeks ago, and any push above that level would be a bullish sign. The next major resistance above $7.59 will likely be October’s high of $9.55, which represents the stock’s highest price in nearly a year.

Takeaway

In February, Chesapeake looked like it could be spending 2016 in penny stock territory. The company and its shareholders are certainly not out of the woods yet, but Chesapeake bulls now have several reasons for hope while they continue to closely monitor key technical levels.

Disclosure: the author has no position in the stocks mentioned.

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