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FIBONACCI


Archer Daniels Midland: Momentum Vs. Resistance

12/01/08 09:40:33 AM
by Donald W. Pendergast, Jr.

Will strong overhead Fibonacci resistance turn ADM back down, or will the power of an established trend power right on through the barrier?

Security:   ADM
Position:   Hold

Archer Daniels Midland (ADM) declined with the rest of the broad market, finally making a major low in early October 2008. Now, after staging a major upside reversal, the stock faces major overhead resistance even as several trend-momentum signals indicate continued strength. ADM is one of the strongest relative strength stocks in the Standard & Poor's 500 right now, based on its rate of change for the past 13 weeks. Let's take a look at the technical chart landscape to see if we can make an informed decision as to ADM's next move.

FIGURE 1: ADM, DAILY. Here's a stock in the cross-hairs, as strong momentum comes to terms with strong overhead resistance.
Graphic provided by: MetaStock.
 
ADM bottomed out ahead of the broad market, making its major low on October 10, 2008. The stock has been remarkably steady, having gained more than 100% since then, despite such violent price swings in the S&P 500. ADM is making a nice series of higher highs/higher lows even as the 14-period aroon indicator, a reliable trend intensity tool, confirms the current bullish bias, even though it has turned down a bit. Adding more fuel to the bullish side of the equation, the stock has just completed a 20–50 exponential moving average (EMA) crossover, a fairly dependable indication of an intermediate-term trend. On the bearish side of the equation, the relative strength index (RSI)(14) has failed to confirm the latest high in ADM, a possible warning of a pause in the trend and/or of an impending reversal. Sitting above all of this price action is a confluence of a Fibonacci 38.2% and 78.6% resistance levels that agree that the $27 will be an important barrier for the stock to overcome. Beyond that, major resistance exists near a prior high at the $31 level. See Figure 1.

Given the technical picture, what might a trader with a long ADM stock position be thinking right about now? Depending on where he entered the trade, he could tighten the stops, take some partial profits, and let the rest ride on a trailing stop or, if he were long-term bullish, he could even sell an out-of-the-money covered call to generate some extra cash while waiting for the trend to (hopefully) resume upward. Since volatility is so high right now, a trader might consider selling a January 2009 $30 call against every 100 shares of ADM, taking in $195 for each short call. Given also that momentum precedes price and that ADM is right near the top of the pile in terms of relative strength versus the S&P 500, this might be a good way for a bullish trader to manage a trade like this, one that sits at a significant technical crossroads — the one where the irresistible force (price momentum) meets the immovable object (strong overhead resistance).

While the trade management alternatives I mentioned might not seem to be of concern to you now (unless you're long ADM, that is), the fact is, as a trader, you need to think about such things well in advance — right when you put on the trade. For example, say you had gone long ADM on a breakout above $19.98 on October 28. You trailed a 2 *average true range (ATR) 10 volatility stop, which is now at $20.55. You feel very nervous about the major resistance at $27, even though you believe that ADM's tremendous relative strength will keep it in a trending mode for months. Would you be willing to risk most of your open profit on a sharp reversal and subsequent stopout at $20.55, or would you feel more comfortable selling half of your shares at $27 and letting the rest ride, using the trailing stop as an emotion-free means of taking you out of the trade? You need to sort through such weighty, emotionally charged issues well ahead of time, because otherwise you'll make the worst and most destructive kinds of trading mistakes — mistakes that will rob you of your peace and your well-deserved profits.



Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address: lineartradingsys@gmail.com

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