Medium term
Trade view / 27 October 2014 at 14:34 GMT

Monsanto looks primed for a tumble

Trader / TheSteadyTrader.com
United States
Instrument: MON:xnys
Price target:
Market price:
Background

The past week and a half has seen the materials sector rally sharply along with the broader market, with the sector heading right back into its previous breakdown point (i.e. into resistance, illustrated by the lateral black line). 

This trend can be seen on the chart of the S&P 500 materials sector ETF (XLB:arcx) below.
S&P 500 Materials Sector
Source: esignal

Shares of agricultural products company Monsanto (MON), part of the materials sector, also rallied sharply but have now bumped back into an area that previously served as support.

Looking at the multi-year weekly logarithmic chart of Monsanto's shares, note that with the recent selloff, its 2010 uptrend was broken while upside momentum has been waning for about 22 months. 

Through that lens, the rally over the past two weeks can be labeled as having been "countertrend" as it bumped into a former support line for a classic re-test move.

Monsanto
Source: Saxo Bank

On the daily chart, we see this one-and-a-half-week rally has found resistance somewhere in the $112.80-$114.80 area, which currently also coincides with the stock's 200- and 50-day simple moving averages (red and yellow lines). 

Last Thursday, MON stock shifted into in reverse after an intraday rally attempt and left behind on its daily chart a bearish outside candle right at this layer of resistance. 

This failed rally attempt at confluence resistance is an attractive spot for traders to try the stock from the short side.

Monsanto
Source: esignal

Management and risk description

With the bearish reversal from last Thursday, traders now have defined risk to lean against — namely Thursday's intraday highs. Any break back above there, particularly on a daily closing basis, would turn the stock from bearish to bullish on a near-term basis.

Parameters

Entry: Short Monsanto using the CFD at $113.00 or lower.

Stop: $115.

Target: $107.50.

Time horizon: Two to three weeks

— Edited by Michael McKenna

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