2 Oversold Energy Stocks That May Be Ready to Bounce

A historically strong bullish signal just went off on Chesapeake Energy Corporation (CHK) and Range Resources Corp. (RRC)

Feb 27, 2017 at 3:37 PM
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Recently, we've been watching stocks that have been flashing historically strong "buy" signals. Among these are Bollinger Band breakouts -- that is, when shares of a stock touch or break below their lower Bollinger Band, which tends to signify they are oversold and ready to make a move higher. Two stocks that have recently flashed this particular signal are oil-and-gas concerns Chesapeake Energy Corporation (NYSE:CHK) and Range Resources Corp. (NYSE:RRC). Below we'll take a look at how traders have been aligning on CHK and RRC, and how sentiment indicators may strengthen the bullish case for each.

Analyst Love Could Lift Chesapeake Shares

CHK gained ground in 2016 -- adding 56% -- but stalled out at an annual peak of $8.20 in mid-December. Since then, the shares have pulled back to support at the 60-week moving average. At $5.62, the stock is off nearly 20% in 2017. With a 14-day Relative Strength Index (RSI) of 28 and with the stock hovering beneath its lower Bollinger Band -- oversold CHK could be about to take off again.

CHK Daily Chart February 27

This seems to be what options traders are hoping for, too. CHK's top-heavy 10-week call/put volume ratio of 6.50 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) is seated just 2 percentage points from an annual high, indicating calls have been bought to open over puts at an accelerated clip. Meanwhile, put selling has also been a popular strategy of late, with 2.82 CHK puts sold to open for each one bought over the past 50 days. It's certainly a more attractive time to buy premium on the stock's near-term options than to sell it, though, as its Schaeffer's Volatility Index (SVI) of 56% is docked in the low 8th annual percentile, suggesting options are pricing in muted volatility expectations.

Outside the options arena, optimism toward Chesapeake Energy Corporation is less prevalent. Short interest is elevated, representing nearly 15% of the security's available float. Plus, 17 out of 21 analysts currently rate the shares a "hold" or "strong sell." Should the security resume its longer-term uptrend, a round of short-covering and/or bullish analyst attention could help CHK in its next leg higher.

Range Resources Near-Term Options Priced to Buy

Since hitting an annual high near $47 last June, shares of RRC have been sliding -- down almost 41% at $27.76. But the stock is still 16% higher on a year-over-year basis, and it could be about to bounce. After all, RRC dipped below its lower Bollinger Band late last week and its 14-day RSI is perched at 26, two indications the stock is firmly in oversold territory.

RRC Daily Chart February 27

Options traders would be happy to see the stock take off, too. At the ISE, CBOE, and PHLX, RRC's 10-day call/put volume ratio of 5.29 ranks higher than 80% of the past year's readings. But premium selling has been popular of late, too. In fact, RRC traders have sold roughly 1.50 calls for each one they've bought in the past two weeks. During the same period, 5.63 RRC puts were sold for every one that was bought. Nevertheless, the stock's SVI of 42% is lower than 89% of comparable readings from the past 12 months, pointing to unusually low volatility expectations being priced into short-term options -- a possible boon to options buyers versus sellers.

Elsewhere, short interest on RRC dropped by about 15% during the most recent two-week reporting period, leaving less than 5% of the equity's total float wrapped up in these bearish bets. And of 22 firms providing coverage, 13 give Range Resources Corp. a "buy" or better rating, while only one calls it worse than a "hold."

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