Deere Stock Gaps Higher and Fades - Here's the Trade

Buy Deere on weakness to its 200-week SMA. Reduce on strength to quarterly and monthly risky levels.
Author:
Updated:
Original:

Deere & Co.  (DE) - Get Report reported stronger-than-expected earnings when it reported before the opening bell on Friday. 

The stock opened at $148, then faded to as low as $143.14. The high was below its quarterly risky level at $152.04.

The Moline, Ill., heavy-equipment maker warned that full-year sales of agriculture and industrial equipment would tumble due to the coronavirus pandemic. For more details read this post on TheStreet.com.

The stock opened at $148, down 15% year to date and in correction territory down 19% from its all-time intraday high of $181.99 set on Feb. 21. 

Deere is also in the bull-market territory 39% above its March 18 low of $106.14.

Deere has a three-quarter winning streak for beating earnings-per-share estimates after missing six in a row between May 2018 and August 2019.

The stock is reasonably priced with a p/e multiple of 14.23 with a dividend yield of 2.14%, according to Macrotrends.

The Daily Chart for Deere

Daily Chart for Deere

Daily Chart for Deere

Courtesy of Refinitiv XENITH

The daily chart for Deere shows that the stock had been rising along its 200-day simple moving average (in green) until March 6.

The spike higher to $181.99 on Feb. 21 was a positive reaction to earnings. After this milestone, the stock began to cascade lower.

The downside risk was confirmed by a death cross that formed on March 17. This sell signal occurs when the 50-day simple moving average falls below the 200-day simple moving average. 

The low of $106.14 was recorded the next day, March 18.

The rebound from the bottom tested its 50-day SMA on April 7. The high this day was just shy of its quarterly risky level at $152.04.

The stock then slipped down the 50-day SMA until May 18. Then came the pre-earnings rally that appears to have ended today.

The Weekly Chart for Deere

Weekly Chart for Deere

Weekly Chart for Deere

Courtesy of Refinitiv XENITH

The weekly chart for Deere is positive, with the stock above its five-week modified moving average at $139.49. 

The stock is also above its 200-week simple moving average, or reversion to the mean, at $139.27. 

Deere shares have been oscillating around this average since the week of March 13.

The 12x3x3 weekly slow stochastic reading is projected to rise to 41.21 this week from 39.91 on May 15. 

During the week of Nov. 15 this reading was above 90 as an inflating parabolic bubble formation. This was a warning of the decline to the March 18 low.

Trading Strategy: Buy Deere on weakness to its 200-week simple moving average at $138.27 and reduce holdings on strength to its quarterly and monthly risky levels at $152.04 and $162.31.

How to use my value levels and risky levels:

The closes on Dec. 31, 2019 were inputs to my proprietary analytics. Semiannual and annual levels remain on the charts. Each uses the last nine closes in these time horizons.

The second quarter 2020 level was established based upon the March 31 close.

The monthly level for May was established based upon the April 30 close.

New weekly levels are calculated after the end of each week.

New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.

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.

How to use 12x3x3 Weekly Slow Stochastic Readings:

My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold.

A reading above 90.00 is considered an “inflating parabolic bubble” formation that is typically followed by a decline of 10% to 20% over the next three to five months.

A reading below 10.00 is considered as being “too cheap to ignore” which typically is followed by gains of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.