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When Technicals And Fundamentals Come Together


Regular readers will by now be aware that I have a preferred style of trading. It is essentially contrarian and I like to buy things that have been under pressure, but with the caveat that I usually wait until there are signs of a turnaround. That does leave me vulnerable to the occasional dead cat bounce but the damage from those occasions is limited as a result of the new low providing a logical level for a stop loss order. There are a couple of energy stocks that fit that description right now, but Antero Resources (AR) is particularly appealing.

Antero is an old friend that I have used to play fluctuations in energy stocks in the past. The stock has enough volatility to offer a decent potential profit on a move, but enough liquidity to make good fills on stop losses likely. It is, in other words, a perfect trading stock, and it sets up nicely for a buy right now.

(Click to enlarge)

I will admit that at first glance the 1 year chart above gives the impression that only somebody with an intense hatred of money would buy this thing, but that is usually the case with this type of trade. Close things up a bit to look at just the last few weeks, though, and a different picture emerges.

(Click to enlarge) 

This chart strongly suggests that a bottom has been found just above the nice round $20 level and that the long-term direction is in the process of a reversal.

The other thing that my hordes of loyal fans (where is the sarcasm font when you need it) will know is that a chart reading, even one as simple and seemingly clear cut as the above, is not sufficient reason for me to pull the trigger on a trade. There must be a compelling fundamental case too, and there is for AR.

As many of you will already know, Antero is an oil and gas exploration and production (E&P) company. They are based in Colorado and active mainly in the Marcellus and Utica shale fields, with production that is more biased towards natural gas than oil. That combination of gas and shale is the main reason the stock has been under so much pressure recently.

After a decent rally last year, natural gas prices collapsed in January and February, while oil has been trading sideways to lower for most of this year. That is a negative for any firm, but for one that is all about the relatively expensive business of extracting from shale it is guaranteed to weigh on the stock. Despite those less than optimal conditions, however, Antero not only reported positive EPS for Q1, but even beat expectations.

That leaves them poised to take advantage of any increase in commodity prices, a move that looks to be underway. The worst of U.S. overproduction of oil seems to be behind us, for now at least, and an upcoming OPEC meeting should lend further support next week. Natural gas remains volatile but is in a long-term upward trend. That looks likely to continue as the effects of increased export capacity are felt, so the best may be still to come.

All in all, it looks as if the rationalization that Antero has undergone recently is now beginning to show results and an expected rise in commodity prices will give the stock a substantial boost. Buying here, at around $21, with a stop just below the low, at say $19.50 and an initial target of somewhere around $25 offers a good risk/reward ratio with a good chance of success…just the kind of thing I like!

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