Interactive Investor

Chart of the week: Odds are good for a turn here

20th November 2017 12:36

John Burford from interactive investor

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A Buy Low/Sell High candidate?

I thought I would go somewhat off piste today and cover a venerable 110-year old US company that is one of the granddaddies of the agricultural commodity trade - Archer Daniels Midland. It trades and processes mainly ag commodities (grains) -that most basic of human needs. It is definitely not one of the high tech-laden FAANGS!

I believe this share is a great candidate for a 'buy low/sell high' strategy. And there are not too many of these on the board in today's record high asset price environment. And being in the basic food industry, the downside is limited - and could even flourish when the tech stars of today lose their shine and investors turn their attention to the basic food industries.

The golden rule taught in Investing 101 courses is to buy low and sell higher. That is the sure road to wealth-building. But it is more observed in the breach as investors always scramble to buy when prices are high and shun stocks when low. Big mistake.

The US ags are having a rough time with massive (and cheap) crops in Russia and other major growing countries so that ADM has had a tough export sell and latest profits are way down.

But benign situations in the ags can turn on a dime as weather plays such a crucial role in current year crops. Crop estimates can suddenly swing either way as weather conditions improve or worsen. Grain traders are on high alert to the global weather pattern shifts.

When there seems to be plenty of grains in store and in the ground, that is often a time the bears are caught short and prices rally -for no reason discernible to those that believe the news makes the market (but is understood by a few technical traders).

Here is the weekly chart:

The shares had a strong rally 2013–2015 on the back of a strong grain bull market, then the inevitable crop surpluses emerged and the shares declined hard off the $64 highs to halve to the 2016 low at $30. From there, the shares have staged a choppy recovery with multiple overlapping waves to the October 2015 high at $49.

With no major weather scares in the current growing season so far, the shares have dipped in three waves to the current Fibonacci 50% support level.

We know from experience that the 50% and 62% retrace levels are the most common places for major market turns, so the odds are good for a turn here (currently $39 area), or a little lower at the $37 level (62%), which would represent an even better buying area.

But what makes my case compelling is the very large momentum divergence between the present and that at the July low (red bars). This is a sign buying pressure is starting to gain the upper hand, despite the slew of negative news.

Does someone know something the rest of the market doesn't? Hmm.

If we do have a major turn here, my first target is the $44 area, where you can be sure we shall read about some positive developments, perhaps weather problems, or even talk of the company being a bid target for the Chinese who need more and more grains for their growing population.

China has a long-standing growing demand for ags as the most populous nation on the planet, and does not grow enough of its own. In fact, in July, they imported the highest tonnage of corn in its history, despite imposing US-disputed tariffs on imports (a common theme for China).

A low risk trade is to go long here (currently $39) or a little lower at $37 looking for a first target at the $44 area. And if the grains catch a major bid this winter, ADM has higher potential to the old high at $54.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Disclosure

We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.

Please note that our article on this investment should not be considered to be a regular publication.

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