Tag Team Trade: MON and How to Use Fibonacci Analysis

 | Feb 01, 2013 | 11:42 AM EST  | Comments
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Jill: I love having the opportunity to co-author trades with my contributors, particularly the ones that do extensive chart work and we can see how the price action confirms my fundamental thesis and options strategy. Carolyn Boroden of Fibonacciqueen.com is one of the most talented Fibonacci analysts in the market place and I am honored to have the opportunity to work with her and feature her superb content. You can also find Carolyn's analysis on Real Money Pro and gain more exposure to her at the many trading expos she participates in. Cramer has also highlighta her work on Tuesday nights for the Mad Money segment and the feedback has been tremendous.

For our tag team we are going to look at Monsanto (MON), a stock in my favorite space to trade. I have done a ton of work in the ags and and you can find my latest commentary in the replay link from webinar with Greg Jensen of optionsANIMAL that we presented on January 29. Also, check out my latest video from the corn pit at the CMEGroup (where the underlying commodities derive their price action) for a more complete look at what moves the ags.

Regarding the ag space it is one of the areas of the market that trade on true fundmental supply and demand which you can see in the equity action and the underlying commodities. I expected choppiness in 2012 with a strong finish at the end of the year and believe that momentum will continue through Q1 and into Q2 which is a seasonally strong time of year for the group. Overall, the combination of drought conditions (weather being the biggest variable), low per acre yields and forward-looking projections suggest that the industry is well positioned for the next several years. This is what needs to happen to keep the story back on the bullish track: 1) signed contracts with China and India will not necessarily translate into upward earnings in 2013, but they may lead to a sharper decline in inventory drawdowns which could limit further price declines; in addition, the contracts could be viewed as a sign that the bottom has been reached; and 2) farmers opting to fully maximize potash applications despite soil tests that might indicate otherwise.

MON is the world's largest seed maker and capitalize on genetically modified crops and a global agricultural boom. Chemical makers make their money by selling their fertilizing products to farms. They get more business when the conditions are like they currently are; drought ridden fields are prime for the fertilizing companies. Potash suffered a big drop in the financial downturn but MON continued to post big sales growth numbers over the period since 2008.

MON's performance advantage over competitors is growing -- after profit plunged 47% in 2010 -- the stocks has gained 87% over the last two years. The company went back to the basics of reconnecting with customers. In an interview with the Wall Street Journal, MON's CEO said he focused on consistency. "We became predictable with our pricing, we became consistent in our messaging, and we've been tracking that throughout the three-year period." In the latest quarterly report, MON's sales shot up 21% riding on solid demand for seeds from Latin America together with pre-spring orders from the U.S. farmers which is very consistent with my thesis.

Even though the ags have made a fabulous run, I believe there is plenty of room to run and want to capitalize on that momentum and fundamentals. It's a volatile group to trade but also a solid long-term investment as the global population grows and the demand needs to be met. Basically, there are plenty of opportunities for the momentum trader to capitalize on as well as the buy-and-hold investor. Let's turn to Carolyn and see how to use Fibonacci analysis and what her chart work is telling us.

Carolyn: If you are not yet familiar with my type of technical analysis, there is a formula for making money with my Fibonacci Time and Price that has been discussed in prior articles on this site. It is as follows:

Setup + Trigger = Trade entry then follow with trade management

First I need to see one of my three trade setups. They are as follows:

Fibonacci Price Cluster Setup: The coincidence of at least three Fibonacci price relationships that come together within a relatively tight range. These clusters identify a key support or resistance decision.

Symmetry Setup: The definition of symmetry is similarity or equality of swings in the same direction. We find symmetry setups by running a 100% price projection or "measured move" of a prior swing and then projecting the results from a new high or low (depending on what direction you are coming from) The only symmetry setup I like to focus on is when swings are similar or equal within the context of the trend. For example, if we are in a clear uptrend, I will measure the prior corrective declines within an uptrend and project 100% of those from any new high to help you enter the market in the direction of the trend. A single symmetry projected IS considered a setup, though other price relationships may overlap these projections which only strengthens the setup.

Two-Step Pattern Setup: A two step pattern setup is also a Fibonacci price cluster as it will include the coincidence of at least three Fibonacci price relationships, but it will be within the context of a zig-zag pattern.

Second, I watch the setup zone and see if price holds when it tests the zone. It does NOT have to be a PERFECT hit of the zone, but it should be relatively close. (For example plus or minus 20-80 cents in a stock setup, though sometimes I will give it a little more room.) If it does respect the price decision, I then dial it down to a lower time frame chart to look for a trigger entry.

A trigger is essentially price activity on the lower time frame that suggests that it is worth placing a bet against the setup zone.

Now the trigger that you use will depend on whether you are taking a day trade or a swing trade. For day trades, I will use anywhere from a tick chart to a 5-minute chart to trigger an entry against one of the setup zones. For a swing trade, the aggressive chart is the 15-minute. Otherwise I will wait for a trigger on the 30-minute chart. (Keep in mind, that there will be more stop outs using the aggressive trigger. Only use this if you feel rather strongly about a setup.)

The trigger that I use on all my intraday charts is essentially taking out a prior swing high for a buy and taking out a prior swing low for a sell. This also needs to be confirmed by an 8/34 ema moving average crossover. We need a crossover to the upside (8 above 34) to confirm a buy and a crossover to the downside (8 below 34)

Targets: The initial target for any of my trend trade setups is the 1.272 extension of the swing into the trade zone. Targets 2 and 3 are 1.618 of the same swing and then 2.618.

The management of the trade will include the initial stop loss order, a trailing stop and/or exits using targets. Some traders will prefer to use a trailing stop and let the market exit the trade for them. Some traders will prefer to exit the trade when the typical targets are met instead.

Let's look at an example of a trade setup in MON via video. This was an actual setup that was posted on Real Money on May 21, 2012.

MON Trade Setup Video

MON ended up holding above the key trade setup decision illustrated in the video. At that time, I drilled down to a 30-minute chart and waited for a buy trigger that suggested it was worth placing a bet on the buy side against this. A trigger did eventually fire off a buy. Now I can not tell a lie and say that I kept this trade as long as I should have, but the mechanics of the formula worked well here. It did actually take 43 days to get to target 1 at the $87.82 area. Some of us just don't have the patience to sit through a trade for that long!!!

The initial stop on this trade setup could have been placed either below the low that was made into the setup zone prior to the buy trigger firing off, or just below the low end of the price cluster of support for those wanting to give it a bit more room. I would have considered myself "wrong" the trade if it took out the $69.70 swing low.

Now bringing this setup into current time, MON has made two key targets to the upside and this has been one of Jill Malandrino's favorite AG setups! Target 3 is not too far away at $106.99.

OptionsProfits can be followed on Twitter at twitter.com/OptionsProfits

Carolyn can be followed on Twitter at twitter.com/Fibonacciqueen

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