From time to time I like to give readers a heads up on potential trading opportunities. Before considering any trades outlined in this newsletter, always remember that you must decide for yourself if you personally like the trade.
One key factor in making that decision will be to decide which side of the trade you believe gives you the highest probability of success. In other words, do you like the short side of the market, or do you like the long side? You don’t necessarily have “know” what side to be on, but it certainly helps to take a stance. So, if you haven’t thought about it, review the overall indices themselves. Take a look at the S&P 500 for example. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.
The trading opportunity that I’d like to review today is that of MON (Monsanto Co). Before discussing, please review the 1 yr. chart of MON that I have outlined below, with my added notations:
MON has formed two important levels over the last 6-7 months. The main level to watch is the level of $70 (dark green). As you can see, that level has been tested several times (circles) as both support and resistance. A lower level worth watching on any pullbacks would be $65 (light green).
MON’s earnings release yesterday was received well and the stock broke back above $70, which would have been an expected resistance. When a stock breaks through resistance, a trader will expect it to go higher. As a matter of fact, you can see that 2 out of the 3 times that MON has broken through $70 it has continued higher to at least $75 (blue). Lastly, you may have already concluded that $75 would be the next level of resistance for MON.
The Tale of the Tape: MON has recently broken above a key area of resistance at $70. Because of this, MON should continue higher towards the next level of $75. A higher risk long position could be entered now, or a lower risk short position entered on a pullback down to the $70 level, if that occurs. Either way, a stop below $70 would be advised.
There are other potential trades on MON. If you cannot get in close enough to $70 to acquire the right risk/reward, a long position could also be entered on a break above $75. Also, a break back below $70 might be a great entry for a short position, in which case a potential long at $65 also comes into play.
No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade. Capital preservation is always key!
Christian Tharp, CMT