MON Growth Looks to Continue

Tuesday January 15, 11:11 am ET ByAlan Farley, RealMoney.com Contributor

Agricultural stocks have been holding up well in this brutally weak January environment. This outperformance sets the group apart from last year's market leaders. They're one of the few sectors bought heavily in 2007 that are still attracting strong interest. This bullish divergence points to the likelihood of higher prices in the months ahead.

The group attracted firm bids on Friday and Monday, after the USDA's World Ag Supply and Demand Estimates January report confirmed strong demand for a wide variety of grains. Many sector components jumped off well-established basing patterns, while a few ran up to new rally highs.

Let's look at the major agricultural players and see where they might be headed as fourth-quarter earnings season descends on the market. With leadership faltering in so many other groups, will these stocks remain relatively safe havens for investors seeking strong 2008 returns?



Monsanto is the best-known agricultural chemical company, with a market cap of over $66 billion dollars. The stock has been moving higher in a powerful uptrend for the last five years. It carved out an all-time high on Monday, after filling a gap between 112 and 117.

Note how last week's 11-point intraday decline and reversal reduced short-term selling pressure and set the stage for Monday's strong rally. However, the recent volume pattern points to profit-taking under the surface and could be an early warning of a larger-scale correction as we move through the first quarter

Farm equipment has been a stockpicker's market for some time, with leaders like Deere and notable laggards like Caterpillar . Deere peaked out after New Year's Day, dropped back to 50-day moving average support and surged to an all-time high on Monday.

Like Monsanto, we're seeing a good deal of distribution off the historic highs. However, this stock continues to hold up very well through market weakness. Last week's bull hammer reversal has laid out the swing low to watch in the next few weeks. Notably, the stock needs to stay above 83.61 to keep the bullish tone intact.

Mosaic is crop-nutrient and animal-feed company that trades like a tech stock. Its wide swings point to the influence of short-term traders in day-to-day price development. This isn't likely to change soon, with the sector offering one of the few upside plays right now for the typical chat room crowd.

The stock ran up to "round number" 100 on Jan. 3, pulled back for four days, and zoomed to a new high on Monday. This breakout could eventually lift price another 20 points, but the level rarely gives way without a protracted fight, so look for short-sellers to establish aggressive positions very soon

Terra Nitrogen is the smallest agricultural company in today's review, but it shows the most interesting short-term opportunity. The stock rallied up to 140 in July and pulled back. It returned to this level in December and broke out two weeks later, completing a cup-and-handle pattern.

The rally spike hit 159 a few days later, with price then pulling back sharply. That decline undercut the breakout level for three sessions. The stock jumped higher on Friday and ran up to a new high on Monday. This sets up an excellent trade entry when price pulls back to fill the 147 to 150 gap.

Finally let's look at CF Industries , my favorite short-term play in the sector. No I don't like it because it shows a graceful bull pattern. Rather, the daytrader in me enjoys the wicked intraday spikes. This stock can move like a bandit, with 7-10 point ranges on relatively calm trading days.
The stock mounted "round number" 100 and consolidated above that level for three weeks. It pressed higher with the broad sector on Monday, posting an all-time high. Look for this move to stall out and give way to a pullback that drops price toward 110. That level could initiate a followthrough rally that presses above 130 later this month.