Tuesday, June 8, 2010

"Anatomy of a Rollover: Agriculture Stocks" (MON; MOS; POT; MOO)

Dr. Hazlett gave us a heads up with one of the links in "U.S. MONEY SUPPLY PLUNGES, DOUBLE DIP NEAR?" and Ag Secretary Sees Agriculture Credit Crunch a couple weeks ago.

From Minyanville:
...Monsanto was a name that hit my radar at the time. As the general market indexes continued to rip higher, I noticed that certain stocks were unable to make new highs and keep up with the general trend. Take note on the above chart, where I first wrote about the potential for short-side opportunity in Monsanto. While in hindsight my read was a bit ahead of the general market malaise, Monsanto provided an excellent “advance warning” on what was about to unfold. At the time, it was struggling to keep its head above the ever-important 50-week moving average. The full on shorting opportunity in Monsanto didn't come until March 2010 when the lateral trendline marked above was taken out. Nonetheless, way back in September 2009, Monsanto was telling us that something was amiss and that we should proceed with caution.

Click to enlarge

After seeing the chart of Monsanto, I immediately set my charting software to pick up all agricultural-related names and see if there were any other names exhibiting weakness. Mosaic caught my eye as another name that was having trouble putting in new highs. While Mosaic was trading above its weekly 50 MA at the time, I was also watching to see if it could put in a swing high on the weekly chart. To that end, I had drawn a descending trendline connecting recent lower highs and suggested that readers watch this for their cue.

Over the next few months, Mosaic broke above this trendline, negating any short-side opportunity, but I kept it on my radar knowing that Mosaic lagging the general market was a huge signal that couldn't be ignored. The major averages kept rising into nosebleed-thin air, but the Ag names were struggling to stand upright. Confirmation was also coming from the financial ETF (XLF), which was also lagging just a bit. The final piece of the puzzle for me was to see when the semis (SMH) would break, which didn't happen until very recently.

Click to enlarge

Because my eye has been following the Ag names for more than six months now, it was only a matter of time until Potash joined the fray. In late April of this year Potash broke through a 14-month ascending trendline as well as a 50-week moving average on the verge of turning lower. While Potash has already dumped off of its 2010 highs of $128 and change, this sector could truly just be getting started. I'd watch for another leg down that takes out the May 25 lows of $92.87 as an opportunity to start a small short position in Potash. The 50-week moving average around $104.00 would be a solid place to put a stop, so gauge your risk and position size accordingly.


When the big boys in a sector start to show weakness, it pays to do the homework and start the heavy lifting of running through the charts and finding the next hidden gem. Monsanto and Mosaic gave us the tip off, and Potash now has the opportunity to cash in.