EQT Corp. Caught in a Downward-Sloped Trend Channel

The global economic slowdown has caused demand for oil and natural gas to fall. A recent report from the U.S. Energy Information Administration shows that the demand for various natural gas products will decline by 3% in 2020 and the demand is expected to remain low in 2021.

This isn’t the news natural gas producers wanted to hear after struggling in recent years. EQT Corp. (EQT) is one of many natural gas producers that have seen stock prices fall over the last few years.

The Pittsburgh based company has seen its stock price drop from a high of $59.15 in 2014 to a low of $4.21 earlier this year.

EQT’s stock price has since bounced back and has recently been hovering around the $17.50 area. Unfortunately the stock hasn’t been able to close a day above that level, even though it has been above the price on three different days.

We see on the monthly chart below how the stock has moved lower in a pretty methodical manner over the last six and a half years. A trend channel defines the various cycles within the overall downward trend and the stock is near the upper rail of the channel at this time.

We see that the 10-month RSI is the highest it has been since 2016 as are the stochastic indicators. On the weekly chart, the indicators are or were in overbought territory in the last few weeks.

Weak fundamentals

The downward slide in the stock is justified based on the fundamental performance of the company. EQT has lost money in three of the last four quarters and earnings have been declining for the past three years.

Revenue has been increasing by an average of 19% per year over the last three years, but it fell by 60% in the second quarter. If earnings have been declining while revenue has been increasing, what will happen if revenue starts declining as demand for natural gas and oil falls?

EQT’s management efficiency measurements are well below average. The return on equity is a paltry 2.1% and the profit margin is well below the average stock at 6.8%.

I can see EQT dropping back down below the $11 level in the coming months. The stock dropped down to $10.52 in June and that area could act as support on another pullback.

With that in mind, I think the best way to play another down leg in EQT is with the November 18 strike puts. The current price of those options is $3.60 with the stock trading at $15.86.

These options would double if the stock drops to $10.80 based on the intrinsic value. The options won’t expire until November 20 and that gives the trade plenty of time to work out.

If the stock drops more rapidly than expected and gets down below $11, you may consider selling half of your options and then keeping the other half open.

If the stock continues lower and breaks through the potential support in the $10.50 area, the next layer of support is down at the March low — near $5. These options would be worth $13 if the stock drops to $5 again and that would mean a gain of 261%.