CHK - Chesapeake Energy Work-Up

CHK, while I haven't personally looked at their balance sheet and holding and honestly probably wouldn't be able to dig up a useful opinion about the subject, is well respected for their balance sheet and holdings, the one thing they weren't well respected for was their CEO.

Last week it was announced that the CEO will be leaving as of April first and there appear to be some very big players interested in the stock, although I really hate when they make these things public because there's always a motivation or angle that doesn't quite jibe with what they are saying publicly, this just isn't the nature of Wall Street to tell others what you are doing unless there's some advantage in doing so and with all the different ways to buy/sell/hedge, sell and then buy, buy and then sell and buy again, etc., one never really knows the angle.

So lets forget about that and just focus on what we can observe.

 First off, we have a 5-day chart (this is where I always start to get a feel for the character) and we have a significant change of character that looks like a capitulation event in CHK in the first half of 2012.

First you have to break it before you can rebuild it.

 This is a perfectly shaped and very obvious rounding base formation, at the arrow is the news the CEO will be leaving which sent the stock up in after-hours and on the open the next day-that must not feel too good if you're the CEO. So the question is do we accept CHK for what it looks like right now?

It would seem to me that in true Hedge Fund style (which was lost many years ago), CHK would make an excellent pair trade with a short somewhere in Energy and a long here, but the question remains, right here or?

 The long term 60 min chart shows a relative positive at the left which would be the capitulation event, so there's been buying here for some time, it apparently didn't step up though until the second half of 2012.

One thing you have to consider is the guys involved in buying here, Loeb and Icahn, both have a reputation for being very activity investors, they buy 5% or more of the outstanding and get a big say so or at least they put out a big say so.

 I remember how contentious it was at MOT where one of my best friends was an engineer for the mobile handset division, Icahn wanted to split MOT in to 2 companies more or less, the handset division which was floundering and their more profitable radio (like police radios) division, which eventually happened.

 I went on a rant in one of my classes about MOT and after the class, an elderly gentleman stepped up and told me how much he liked the class and how he was a former CEO of MOT, I was red-faced and apologized, but he said he was the CEO much further back and agreed with everything I had said.

The point being, from the experience of MOT and what was going on inside the company vs. what the news was, employees knew a lot more than what the news was giving out and they knew Icahn was putting enourmous pressure on MOT to break in to two. I very much doubt that the conversations about McClendon leaving the company was new, I suspect it's been an ongoing battle internally between the shareholders/board and people like Icahn and Loeb on one side and the CEO trying to keep his job on the other so accumulation a year back would make some sense, when they could see they were wining the battle, stepping it up later in 2012 makes as much sense, but what now?

 Even the 60 min chart shows there appears to have been some "Sell the news" on the release of the CEO's impending departure, I wonder whether or not there will be an additional pullback and base building? The larger the base, the larger the move CHK can support, I have no problem owning CHK, the question is where?

 On a 2 day X-Over Screen we have a long signal, but we're pretty far from the typical first pullback to the 10-bar yellow average, given a choice, that's where I want to look at owning a larger portion of CHK.

I'd personally use the 5 day Trend Channel for now being there's a lot of volatility in a base, that gives a stop of around $17 so an entry at $18.50 would be delicious.

As of right now, other than some of the longer term trends, I don't see any strong short term signals for a pullback, I suppose you could enter some here with a very right stop, but this is really where retail jumped in, it's not my favorite place to be, a good shakeout and a move lower would be much more appealing.

I do like CHK a lot, especially as part of a long /short pairs trade, I'm not sure which short I'd take yet with Energy, probably long ERY at some point soon, maybe the industry group pulling back will be enough to pressure CHK down, that would be a golden opportunity.

Just remember from the looks of everything, this is a turn-around, a longer term trade so you need to give it space and breathing room, if you aren't comfortable with wider stops in base areas like this than you can always try to chase a stage 2 momentum breakout with a tighter stop, but I'd prefer to be a longer term investor here at lower prices.

I'll watch for short term signals of a pullback.