Deere (DE - Get Report) before the opening bell on Aug. 16 reported a third-quarter earnings miss. The stock traded as low as $138.51 premarket, but rebounded at the open as the farm-equipment maker indicated that its long-term outlook was promising.
My call is to own a core long position of the stock, then countertrade future volatility, including buying on weakness to its annual value level at $134.22 and selling on strength to its semiannual risky level at $160.91.
The stock has been extremely volatile since trading to its all-time intraday high of $175.26 during the week of Feb. 16, 2018.
The low end of its trading range was set at $128.32 set during the week of Oct. 29, 2018. This was a bear-market decline of 26.7%. A major reason for volatility is that Deere has missed earnings-per-share estimates for six consecutive quarters.
Deere is fairly priced with a price-earnings multiple of 14.79 and a dividend yield of 2.07%, according to Macrotrends.
The agriculture sector faces several headwinds, given the uncertainties in the U.S. Farm Belt and the trade war with China.
Reduced demand for commodities, such as soybeans, and farm flooding during planting season caused delays in new equipment purchases. Deere views these concerns as temporary and it projects that its construction and forestry businesses should return to growth mode longer term. Deere touted that demand from Latin America was strong.
The Daily Chart for Deere
Courtesy of Refinitiv XENITH
The daily chart for Deere clearly shows that the stock has been extremely volatile over the past 52 weeks. The stock closed Dec. 31 at $149.17, which provided input to my proprietary analytics. The chart shows that its annual value level for 2019 at $134.22 held as a buying opportunity on May 17. This was the date of Deere's prior earnings results. This indicates that bad news was priced into share price weakness pre-earnings. The close of $165.71 on June 28 was another important input to my analytics. This resulted in a semiannual pivot at $160.91 and a quarterly risky level above the chart at $180.41. The close of $165.65 on July 31 was also an input and resulted in a monthly pivot for August at $165.09.
The Weekly Chart for Deere
Courtesy of Refinitiv XENITH
The weekly chart for Deere is negative with the stock below its five-week modified moving average at $157.82. The stock is well above its 200-week simple moving average or "reversion to the mean" at $123.26. The 12x3x3 weekly slow stochastic reading is projected to decline to 71.15 this week down from 80.19 on Aug. 9 as the reading falls below the overbought threshold of 80.00.
Trading Strategy: Buy weakness to the annual value level at $134.22 and reduce holdings on strength to its semiannual pivot at $160.91 and its monthly risky level at $165.09.
How to use my value levels and risky levels:
Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31. The original annual level remains in play. The weekly level changes each week. The monthly level was changed at the end of each month, the latest on July 31. The quarterly level was changed at the end of June. My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.