Technical analysis is the study of past patterns that tend to repeat themselves, as this helps us anticipate what future patterns the market may have in store. It is not an exact science but, if it is applied properly, this type of analysis will provide you with an edge in the market more often than not.
With that in mind, I am currently stalking an entry in Monsanto (MON). Yes, the markets are a bit frightening lately -- and the immediate trend in many stocks, and in most of the main indices, is currently bearish. But that does not mean we shouldn't prepare for a possible opportunity within these relatively deep corrections. I'm mostly interested buying stock that still shows a bullish pattern via the higher-time-frame charts, rather than in trying to pick a bottom in the dogs with bearish patterns on the weekly charts.
I'm starting my analysis on Monsanto with the weekly chart in order to make sure it looks OK in this time frame. I'm looking at data as far back as June 2010, and we can see that the larger pattern is still bullish at this point. I noticed that the three prior major declines, of $15.22, $14.39 and $18.20, are similar in price to the current decline. So far, there's been a recent decline of $14.25 from the February highs.
I also noticed that the current decline in Monsanto is similar in time to one of these prior corrections, which had lasted 15 weeks. So far, the most recent low came 15 weeks after this most recent high. If the current swing is only corrective, as the prior swings were, then this stock is due for the resumption of its rally within this next week or so. From my Fibonacci price work, I'm seeing possible support coming in between $68.46 and $69.55 and from $65.51 to $65.75. If the price can hold above here, plus or minus $1 or so, I am going to look to take my buy triggers for an entry. If price exceeds both of these zones on the downside, I will stay on the sidelines instead.
To give you an idea of what a buy trigger might look like, let's look at a prior major low in Monsanto from Dec. 14. I'll show you a 30-minute chart, pointing out what I would have needed to see before I would have placed a bet on the buy side at that time.
As Monsanto traded down into the Dec. 14 low, the pattern on this chart was bearish, with a series of lower lows and lower highs. Once we saw a pattern shift to higher highs and lows, as well as a moving-average crossover (the eight-day exponential moving average above the 34-day EMA), I felt it was OK to place a bet on the buy side, with the risk defined below that low.
Now let's take a look at the current 30-minute chart in Monsanto and see what that looks like. So far we are only looking at a bearish pattern of lower lows and highs, and there are absolutely no bullish reversal indications -- yet.
This tells me I have to be patient and wait for a buy signal in this stock. That is why I'm stalking, but not yet acting on this trade setup. If a buy trigger does fire off in the coming sessions, I will define my risk below the low made prior to the entry trigger.
For more information on trades and triggers, please refer here.
