Agriculture Short Is Finally In Season

The market has had a decent bounce from the deep oversold readings of two weeks ago. The reversal that occurred right as the market seemed headed to oblivion has produced a 10% rally from that Wednesday's intraday lows.

A 10 % rally is nothing to sneeze at, and during bear market declines, not unusual. Volatility has become a normal occurrence, and with it, many trading opportunities, rather than trending opportunities, have emerged. What this 10% rally from the lows has done is bring the major indices and many stocks back to significant resistance points. These rallies have occurred on light volume and much of the recent strength has been focused in laggard sectors that have benefitted from short covering. Our 10-day SARSI is at extremely overbought levels for the S&P 500 and the total market is reflecting this short-term strength.

This has set up what should be an excellent opportunity to look for short candidates to take advantage of what should be a test of the recent lows or the beginning of another leg down.

S&P 500 Depositary Receipts

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The simplest way to take advantage of any weakness is through the S&P 500 Depositary Receipts (SPY - commentary - Cramer's Take). With the S&P 500 having reached back toward the 1400 level, this is providing a low-risk entry point for short sales. This level marks the beginning of the overhead resistance in the index.

The low-volume retracement suggests that much of the buying in this rally has been more related to short-covering than outright buying. Good buying is accompanied by increasing volume, not decreasing. We would be sellers of the SPY at current levels or on any rally back to 1400. Look for a move down to the 130 level. We would use a stop at the 143 level.

Another area we have been trying to take advantage of on the downside has been the agriculture space. This has been the one sector that has yet to succumb in a big way to the recent weakness. The recent strength on the back of the market bounce has brought these issues back to short-term resistance areas. This is providing a low-risk entry into this space. Based on the idea that eventually the selling will find its way to every sector of the market, it makes sense to believe this sector still has further downside risk.

Agrium

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We like Agrium (AGU - commentary - Cramer's Take) as a short candidate in this space. This is an aggressive idea, but the risk/reward setup allows for a low-risk entry at this point. Interested traders could sell the stock at current levels with a stop at the 67 level and a downside target of 50-55.

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At the time of publication, John Hughes and Scott Maragioglio were short Agrium. Hughes and Maragioglio co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indices and sectors. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion. Maragioglio is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Maragioglio has also served on the board of directors of the AAPTA.