See end of post for latest Update (Option position Sold October 22, 2010)
It is time to follow up and report on events since referring to a paper trade, one month ago, in the stock Agro Corporation, (AGCO), trading on the NYSE. The original post detailing the transaction can be found at Simulated Trade Example.
The financial results to date are listed below, after the AGCO charts, under the sub-heading “Current status”.
Here is an update of the chart of AGCO that shows trading until Friday October 08, 2010. This can be used to discuss the points listed below that were mentioned at the time of the original selection of this stock for trading. Click on chart to enlarge.
And here is the original chart shown on the earlier post at the time of the trade: Click on the chart to enlarge for clarity
At the time the paper trade was outlined, I mentioned that reference will made to the following points in order to explain why the stock was a possible candidate for trading and some of the guidelines that help control the trading process.
- the reason for selecting this stock
- what we think the chart patterns indicate
- the target price levels on the upside that the stock could achieve if it follows previously seen patterns
- the price at which to sell if the stock price falls back from its current price
- how best to minimize the loss if the stock does fall in price
- other matters that relate to the stock and the chart displayed
These are commented as follows:
♦ Reason for selecting this stock as a paper trade candidate
The main reason was my own interpretation of a confirmed breakout from a downward channel, this pattern can often signal the beginning of an more extended upward trading trend for the stock – but there is no guarantee. The top chart above indicates the channel and some other factors are mention in the section about chart patterns below.
Current status — paper trades initiated on September 07 :
1. Bought 100 shares at $36.50 each for a total of $3650, not including fees.
2. Bought 2 long November 35 call option contracts at $3.10, to control 200 shares of AGCO until November 10 at $310 per contract, $620 total, not including fees.
AGCO shares closed Friday, October 8 at $40.63 per share
AGCO N0vember 35 call options closed at $6.10 bid, 6.40 asked — if sold at the bid price that would represent a 97% gain, and they did trade as high as $8 earlier in the day. That is an indication of the power of options — and the volatility — as discussed elsewhere on this site, for views on that topic check out Stocks or Options?
♦ What we think the chart patterns indicate
There is no science to chart patterns but traders find them helpful to varying degrees, perhaps just as another indicator for confirmation although some rely almost exclusively on charts to make trading decisions.
Mentioned above is the breakout from the downward channel, marked in the top chart. Other possible common patterns, that I have not referred to before, can be seen on the original chart, one is a cup with handle, sometimes called a saucer formation, and the other is a measured move. Both of theses patterns are described at StockCharts.com – an excellent reference source for technical trading information. The measured move may be the start of its second upward leg, if so that indicates the target of $45 for the stock approximately, although there is a possible resistance at about $40 based on a previous high of last May 2010. The stock also shows a nice bounce off the 50 day moving average blue line in the original chart.
Also, not referred to before, and to which I pay less attention, are the MACD and RSI supplementary charts. On the MACD chart below the main chart, the lines crossing over are positive, and on the RSI chart above the main chart the line indicated a possible upward move.
Gap up
Note, on the new chart, there is a “gap up” from the previous day’s closing price. When stocks show such gaps, up or down, the stock prices often reverse soon after to “cover” the gap, meaning in this case that the price would soon fall to below the price range at which the gap occurred. Not always the case but often.
♦ Target price levels if AGCO follows measured move patterns
Upside would be $45, although as mentioned above, there is possible resistance at $40. Another guiding level is the Delta value of about 95. Delta is explained here: The Option Greeks. Other factors may influence a decision to sell before reaching the chosen target level.
Downside would be the limit set by the stop loss, at say 10 percent of the highest price achieved by the stock. For example, if the stock falls in price by 10 percent from $40 to $36, it will be sold, whether a winner or a loser. Other factors may influence an sell decision at less than a 10 percent reversal from any given price.
♦ How best to minimize the loss if the stock does fall in price
This is dealt with in the last paragraph discussing downside, but the risk management mechanism is to set a trailing stop loss. Trailing stop losses are covered here: The Exit Price.
♦ Other matters that relate to the stock
Occurring last Friday, October 8, and quite unforeseen, was a sudden rise in the stock price that was the result of the morning’s release of economic news by the Department of Agriculture that indicated a reduction in the supply of corn, wheat, and soybeans. Agco Corp. is a manufacturer and distributor of agricultural equipment and the speculation is that equipment sales are likely to receive a substantial boost.
Because of the news, the share volume jumped from the daily average of 1.8 million shares to 6.4 million shares.
However, some observations:
The stock price dropped from the high of the day — I would sell half
Remember this is only paper-trading – much more easy to make decisions when there is no cash on the line.
The stock price high of $43.27 – a gain of 18 percent above our $36.50 purchase price — occurred around midday, that would have been a great time to think of selling if the price did not go higher, especially the options – and the price did drop steadily after that to close at $40.63, 11 percent above our purchase price and on steadily increasing volume. That may have been due to some profit taking or because of so-called sober second thought. After not exiting at the highs but without waiting for the lows at the close, I would have sold half of the position at a price on the way down that would provide a 100 percent gain on one option contract and 15 percent on the shares.
Earnings announcement
October 25, 2 weeks away, earnings to be announced, this needs to be taken into consideration. The days leading up to earnings announcements sometimes exhibit “abnormal” activity. Needs to be watched for.
What happens next?
My own expectation is that Monday, when the market re-opens, there will be a further decline and perhaps some profit taking but longer-term the company’s prospects are very good and the stock should increases substantially in price and trading volume will return to normal.
An important short-term price factor is the gap-up that occurred on Friday morning, as mentioned above, the price gaps, prices at which no trading occurred from the closing price of the previous day, are usually covered soon after. In which case the stock price will fall, probably only temporarily, to below the Thursday night close.
In conclusion
On this paper trade, if I was aware of the unusual trading of Friday, I would have sold one of the two option contracts at some price on the way down, after the high had been reached, that would capture a 50 percent or more gain.
Subject to actions dictated by future price action in the stock, I would hold the other option through the normal pre-established personal time frame, as suggested in the 4 rules for trading options. That would be until October 20 approximately, less than 2 weeks away. By then if the options have not been sold it is time to sell, but possibly consider rolling up, although around that day earnings announceements are due, see note above.
As for the stock, I expect it to be worth holding for a longer period with the target of $45 still a governing factor but that may be necessary to revise if the stock meets considerable resistance at the $40 level.
Reminder – this is only paper trading, there is no money at risk, decisions are more difficult to make when there is real money involved.
I will try to remember to post Monday’s chart!
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Update after the close, October 11, 2010
As it turned out AGCO held its gain and added some in today’s trading, which was a lot less than Friday’s volume but at 2.2 million was still above the 3-month average volume. So at the moment our $45 target stays intact, and who knows we might be able to raise it somewhat.
But the main thing is that we are using the charts to keep us appraised of the progress and that is the purpose of the article in the first place — to show that what happens in the market can be seen in graphic form. By examining the chart — if the chart reader is familiar with some of the “standard” patterns that repeat quite often — the pattern interpretation might help in a decision making process, knowing the odds may be more favorable but no guarantees.
Here is today’s chart showing the action — I still am watching the gap up at Friday’s opening, knowing that sooner or later the price will reverse to below the gap, at least temporarily, as described above.
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Update after the close, October 22, 2010
Today, in accordance with the pre-established plan discussed in the earlier AGCO posts, requiring that we exit the option position no later than one month prior to expiry date (November 20) the November 35 options bought on September 07 @ $3.10 were sold @ $8.75 providing a gain of $5.65 x 200 = $1130 = 182%.
The shares will be held until we see the action around earnings announcement on Tuesday next, October 26, 2010.
This the chart to October 22, 2010 — click on to enlarge and for sharper image.
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