Deere in The Headlights (DE)

Nothing runs like an ag stock propped by infinite amounts of Fed stimulus and congressional cash infusions.

You tell ‘em, Sally!

And that’s where we are.

Today’s trade is a play on an overbought Deere stock (NYSE:DE), which has risen 130% since the Wuhan Bat Bottom back in March.

Have a look –

Technically, the stock looks tired –

1. RSI was overbought for two full weeks through the beginning of September (green box), and
2. Since then, price has diverged steeply from both RSI and MACD indicators.  This action is indicative of a loss of buying momentum (also in green).
3. We also see a narrowing range of trade (in red), with a rising wedge pattern now forming.  A break below the bottom red trendline would ignite great deal of technical selling.
4. And the ‘key’ to that ignition may have been offered just four trading sessions back, with the appearance of a gravestone doji (enlarged, in black), a generally trustworthy reversal signal.

Now, we’d happily look the other way after such a rise if the company in our sights wasn’t an old world manufacturer of nuts and bolts metallica with a market cap of $76 billion.

But that’s exactly what she is.  And there’s no camouflaging it.

Nor might you blind the following numbers –

• The stock carries a full year trailing earnings multiple of 28,
• A bloated P/B of 5.74,
• Offers a nominal annual yield of 1.29%, and
• Maintains a heavy debt load (Debt/Equity is 3.76).

Have a look now at the weekly chart –

Let’s parse it:

1. To begin, a weekly RSI indication that brushes that close to overbought is a shot over the bow (in green).  It demands you sit up and take note.
2. MACD’s apparent rollover – just now commencing – should also ring a bell.
3. Moreover, a weekly bearish engulfing pattern, if it holds (we still have two full days of trade ahead of us), will draw a great number of DE bears into the fray (in black).

DE got far too disconnected from her moving averages over the last several months.  And it appears to us that gap is about to close.

Figure on everyone getting back together by Thanksgiving.

And feasting on a PUT spread (defrayed by the sale of a CALL spread)!

A Jew and His Gold recommends you consider selling the DE December 18^th 250/260 CALL spread for $2.55 (7.40/4.85) and using the funds to purchase the DE December 18^th 220/200 PUT spread for $4.30 (7.15/2.85).  Total debit on the trade is $1.75.

Rationale: with DE expected to decline, we want as much downside exposure as we can get – with as little outlay as possible.  The sale of the CALL spread helps in that regard.

With downside gaps to fill at 190, 184, 178 and 160, and a simple Fibonacci retracement calculation bringing the stock to 190, we feel the PUT parameters are realistic.

All that’s required is a trigger.

And we believe the election will provide that.

Maximum loss on the trade is $11.75.

Maximum gain is $18.25.

Many happy returns!

Matt McAbby

Follow @HughLOHaynew