How Emotional Traders Got Burned on Monsanto (MON)

06/25/2010 12:01 am EST


Corey Rosenbloom

Founder and President, Afraid to Trade

Last night, I was doing relative strength analysis on stocks to the S&P 500 year to date and found out that Monsanto (MON) was the second-worst-performing stock—relative strength wise—in the entire S&P 500 year to date.

It wasn’t that long ago that Monsanto and Potash (POT) were high-flying stocks that swing traders loved to trade while their prices were soaring into the stratosphere. That was 2008; this is now.

Let’s take a look at the rise and fall of Monsanto and see where we are today.

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From 2003 to 2008, Monsanto (and Potash, a similar company) was one of the best-performing stocks out there, rising from the $10 level to peak in mid 2008 at $140 before a devastating collapse took the price to $50.00 per share now.

There’s a good lesson I want to highlight with this stock.

First, notice the arc pattern. This is an important point that most new traders aren’t aware of. When price rises in an exponential arc, the price rise is unsustainable and will likely collapse. Not just fall, but probably collapse.

Look for a take profits or exit signal when price breaks the rising exponential arc trend line. It’s like playing musical chairs in that it’s a dangerous race for safety when the music stops, and some traders never do hear the music stop.

Second, notice the obvious shooting star/reversal doji candle—with the long upper shadow—for the month of June 2008. Look closely to see that the 3/10 momentum oscillator formed a crystal clear negative monthly divergence (lower peak) at that time.

These are signals you should not ignore.

Rise above your emotions (such as “This stock will rise forever!”) and look at the signals from the chart and from history.

After a lengthy rise, there is often a consolidation or deep correction. Such is occurring now. I’m labeling the “A” and “B” waves, placing us currently in a large-scale “C” wave down, in Elliott Wave terms.

Let’s now turn from the past to the present to see where the recent short-term levels to watch in the stock exist.

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Similar to the June 2008 peak, we had another short-term price peak at $85.00 that formed on a negative momentum (3/10 oscillator) and volume divergence.

The key line in the sand—prior support at $67.50 from November 2009’s swing low and $70.00 from four tests in 2010—was officially broken in April with a gap down and surge in downside volume (a rise in volume as price headed lower).
This was a confirmed breakout that suggested lower prices were likely, and they certainly came. Price broke the support line and carried down without stopping until the recent bounce at the $50.00-per-share level.

Now we are seeing a very small positive momentum divergence, though price has since resisted against its falling 20-day EMA, which lies just above $50.00 right now.

Watch the $52.00 area and the 20-day EMA for any sign of life, and unless that happens, a break under the June low at the $49.00 level signals the potential for even lower prices yet to come.

By Corey Rosenbloom, CMT, trader and blogger,

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