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Invasion of the Wheat Snatchers! (ADM)

Posted on March 21, 2022

The Archer Daniels Midland Co. (NYSE:ADM) once touted themselves “Supermarket to the World”.

And today, with the Ukrainian wheat supply officially off-line, folks are speculating that ADM stands to profit like a band of brigands from supply shortages and inflating commodity prices in general.

And it’s all quite possible.

But stock prices can also get overly inflated.

And snapbacks occur when you least expected them.

That’s why we’re taking aim at Chicago’s ADM today, the company that (in its own words) “procures, transports, stores, processes, and merchandises agricultural commodities, products, and ingredients in the United States and internationally.”

That is to say, there your classic business middle-man.

The company was founded in 1902 and has been ripping off salt-of-the-earth farmers ever since.

But enough with the introductions…

ADM has a fairly solid line-up of fundamentals –

  • Price/Earnings is 17.56, reasonable by today’s reckoning,
  • The dividend is a secure 1.76%, and
  • Price to Book is 2.11.
  • And yet EPS are expected to decline next year by 0.40% according to consensus estimates, and
  • Whereas growth for the past five years was a robust 17.20% per annum,
  • The next five are expected to bring just 2.90% on average.
  • So there’s little to go mad about here.
  • In addition, insiders dumped 18.96% of their holdings over the last six months for a total of $49 million dollars.  But a full $42 million of that sum was pocketed in just the last seven weeks!

Proving there’s ample reason to suspect the stock has run its height.

Have a look now at the daily chart –

Here, we see an overall weakening technical picture –

  1. Price is approaching the bottom of a three month rising trend channel (in red), and
  2. Last Friday’s action was particularly frightful.  The bulls unleashed twice the daily average of buying to eke out a mere 0.24% gain on the day (in blue).  That’s a right good waste of ammunition, in our view, and it doesn’t bode well for the week to come.  It was the single biggest day of trade for ADM in better than 37 months.
  3. The rise to new highs left gaps to fill at 76, 72 and 69 (in purple), and
  4. With first support at 80 (and rising, marked by the lower rising trendline AND the short term moving average), all we need is a hiccup for the stock to break below that level, and we’ll likely see a fall to the first of those aforementioned gaps.
  5. Next major support arrives at the 137 DMA at 69 (and rising – light blue).
  6. RSI is weakening and MACD has begun rolling lower – both bad omens (in green).  When they hit their respective waterlines, we’ll likely see a powerful rush of selling.  But that’s still a ways off.

Now look at the weekly –

Here, the evidence is more damning –

  1. Weekly RSI is straddling the overbought 80 line for nearly three full weeks now (in green), while MONTHLY RSI (not seen here) is also overbought.  All told, this puts the bulls in an extraordinarily precarious position.  It’s patently not a time for buying.
  2. MACD is also beginning its roll lower.
  3. The latest gains have been accompanied by tremendous volumes (in black) – twice the weekly average – and point to a distributive phenomenon.  The insider selling into the rise is indicative of the same distribution.
  4. The bunched moving averages in the 50 range (in blue) will act as a magnet on price, which has gotten too far from the stock’s natural growth vector to make any sense, even with the geopolitical pressures now in play.
  5. Dr. Fibonacci suggests a retracement to 65 is the next natural turn for ADM (in purple).

We don’t need such a massive decline to prosper from the trade, though.  The structure of the bet allows for a huge takeaway on just a minor pullback.

Like this –

A Jew and His Money recommends you consider selling the ADM May 20th 80/82.50 CALL spread* for a credit of $1.20 (6.30/5.10) and buying the ADM May 20th 82.50/80 PUT spread** for $1.30 (3.80/2.50).  Total debit on the affair is a dime.

[*Sell the 80 CALL and buy the 82.50 CALL.  **Buy the 82.50 PUT and sell the 80 PUT.]

Rationale: spending ten cents to pull in $2.40 is a fine prospect, we say; it constitutes a gain of exactly 2400%.

Max loss is $2.60 (difference between the CALL strikes plus the initial debit).

Breakeven on the trade arrives at $81.15, just 3.3% below the current price.

The full 2400% is banked on a decline of a mere 4.7%.

All told, it’s a steaming breadbasket filled with yummies.

And as always, feel free to take on multiples of the trade – musculature permitting.

Love the Lord, G-d of Israel, and keep Him before you always!

Good Jews and Noahides…

The plot thickens.

With kind regards,

Hugh L. O’Haynew

 

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