Technical Outlook: Chesapeake Has Potential - TheStreet

Technical Outlook: Chesapeake Has Potential

At this point, the stock could be a low-risk trade if you keep a sell-stop under Thursday's low.
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Just when investors thought it was safe to dip a toe back into the water, the market tides shifted and the undertow took no prisoners.

Thursday's sharp reversal certainly caught many investors off guard, but this is a normal occurrence in a bear market where the indices rally sharply on short-covering that sucks in the unsuspecting and then slams them as the primary downtrend resumes.

This is the scenario I was referring to in

last week's column

in which I wrote, "My current indicators are pointing to a high probability that the recent rally may have a little more to go, but it was inspired by short-covering. From here, the major indices could possibly move higher by a couple of percent and then resume their primary downtrend."

The reason I didn't trust the move was because it was led by the weakest groups in the market -- sectors such as the financials and the homebuilders. Investors need to understand that new bull markets or primary uptrends normally begin with new market leaders and not the weakest groups from the last bull run.

That is why I look to find the companies that are holding up against the downdraft when the market plunges. At this point, they are few and far between, but there are some interesting ones appearing, and I have been highlighting them over at

RealMoney.com

.

In last week's column I also pointed out that large volume spikes in stocks or sectors along with abnormal movement in the stocks often points to a change in institutional buying. When institutions remove their support from an area of the market, individual investors are not going to be able to hold it up. That is how I knew the commodity and oil sectors were running into trouble.

Volume can also work on the positive side. When a stock goes into a sustained correction and you see a tremendous amount of volume at the end of the slide along with a wide intraday move, it often points to an intermediate-term low.

If the low is valid you will also often see the low of that day hit a major support area and a spike in buying over the next few days. This is often a low-risk investment because you can put a protective sell-stop underneath that low. If you are wrong, then you risk only a few percent.

As I was scanning my charts last night I noticed

Chesapeake Energy

(CHK) - Get Report

exhibited this exact behavior.

CHK

Click here for larger image.

Source: TC2000

You can see from the chart above that Chesapeake endured a 30% drop over the last few weeks. It sliced through the prior support of the important 50-day moving average. Institutions often have buy or sell programs sitting at the 50- and 200-day moving averages, and when it is removed you can see the results.

Over the past several days, the volume dramatically increased because investors panicked as prices continued to slide. That panic appears to have removed the weak holders from the stock, and it held important support yesterday. The other thing I like is that it broke below the 200-day moving average on an intraday basis, which likely triggered sell-stops under that level.

The positive from all this is that the support held and the stock closed near the high of the day. On the other side of the coin, a fall like this is not easily recovered and all of the prior support now becomes resistance. If the stock is going to get through this resistance, it will take some consistent buying from institutions.

The first target if the stock continues to move up would be the 50-day moving average, and how the stock reacts at that level will be very important. If it hits that level and starts to roll over, then more downside testing could be on the way. However, at this point, it is probably a low-risk trade if you keep a sell-stop under yesterday's low.

At time of publication, Manning had no positions in stock mentioned, although holdings can change at any time.

Mark Manning, AAMS, is an Accredited Asset Management Specialist and Registered Investment Advisor with Butler, Wick & Co., where he specializes in wealth management. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Manning appreciates your feedback;

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to send him an email.