The energy sector has showed great relative strength in recent weeks. While the broader market has been choppy and momentum groups such as social media and biotech have taken a beating, energy stocks have steadily rallied. #-ad_banner-#​

This constructive price action led me to take a closer look at a number of energy stocks, one of them being Chesapeake Energy (NYSE: CHK). The natural gas and oil producer looks enticing from a technical standpoint, as it appears to be on the verge of breaking out of a multi-month trading range.

On March 28, the Energy Select Sector SPDR (NYSE: XLE) broke past a multi-month resistance level around $88.50, which may be just the beginning of a multi-month rally. 

Considering that the current bull market in equities is about 5 years old, it’s likely getting somewhat long in the tooth, at least by historical standards. I think we’re in the late innings of a cyclical bull market, which often favors large caps, as well as basic materials and energy stocks.

For a better view of relative performance, I often turn to ratio charts. Ratio charts show just that, a ratio between two securities or indices, such as the chart below of XLE compared with SPDR S&P 500 (NYSE: SPY). The relative strength of XLE versus SPY over the past two and a half weeks is clearly visible.

On March 27, the ratio chart first broke past multi-week lateral resistance and now has reached an even bigger multi-month diagonal resistance line. The construct of the ratio chart is bullish, and I see it moving higher and past this diagonal resistance line in coming weeks or months.

Barring any sudden bearish reversal from exogenous events, energy stocks are likely to continue their climb in the near to medium term.  

Taking a look at the multi-year chart of CHK, several things stand out. 

First and foremost, note that the stock’s uptrend since its summer 2012 lows remains firmly in place and supported by a still rising Relative Strength Index (RSI). 

Second, the double top from March and August 2011, in the mid-$30s, now looks to be acting as an upside magnet. CHK could certainly see that level again over the course of the next three to six months.  
Moving on to the daily chart, this is where the real juicy part of the trade setup comes into play. 

Keeping in mind the relative outperformance of the energy sector in what is likely a late cyclical bull market, note the sideways consolidation pattern that CHK has been trading in since October. In the bigger picture, it could be viewed as a massive and constructive bull flag pattern, which, as the name indicates, often resolves to the upside. 

During the past week and a half, CHK has worked itself back above its 50-day, 100-day and 200-day simple moving averages and to the top of the trading channel. The stock may be a little overextended in the short term, but if after a few days or so of consolidation it manages to move past the $27 area, I would get interested in a long position with an initial target of $29. If that target gets hit, I would take partial profits and use a trailing stop for the remaining position.

Action to Take –>
— Buy CHK on a daily close above $27
— Set stop-loss at $25.70
— Set initial price target at $29 for a potential 7% gain in four to eight weeks

This article was originally published at ProfitableTrading.com: 
Watch This Energy Stock for a Breakout ‘Buy’ Signal