Monsanto's Stock Jumped Above Its Range and Will Likely Fall Back

Monsanto (MON) reported fiscal first-quarter earnings on Thursday that exceeded expectations.

Earnings of 21 cents a share beat the analysts' forecast by 25 cents. Revenue was $2.65 billion, better than the $2.28 billion that was projected.

In spite of this modest positive outcome, the stock saw a huge rise Friday of 2.78% The chart shows exactly what occurred and what this means.

On this chart, two versions of Bollinger Bands have been overlaid. The default version consists of two standard deviations for upper and lower bands from the middle band simple 20-day average.

The outer band reflects three standard deviations. Price rarely moves above this upper band or below the lower band.

In fact, Friday's close of three-quarters of a point above the upper band was the first time in the past six months that the price moved higher than the upper band.

The likelihood of a retreat back into the "normal" range is quite high and also likely to occur very quickly. But how far will it retreat?

Most of last month saw trading in a narrow consolidation range between $105.25 and $103.50 a share. Only on earnings day did the price move higher.

So a retracement should be expected to return not only below the upper bands of both versions of Bollinger but probably back to this established consolidation range.

Confirming the high likelihood of a retracement was momentum. The relative strength index reported a move above 80 or more than 10 points higher than the important overbought index level of 70.

With this price and momentum pattern in mind, look at the options expiring in 11 days, on Jan. 20. A viable trade based on Friday's closing price of $108.13 is the 108 long put.

It closed on Friday at an ask of 3.45. Adding trading fees, this will cost about $354.

So break-even is at $104.46 a share (strike of 108 minus cost of 3.54). With 11 days remaining to expiration, time decay is a challenge, but with the expected rapid retracement of price, it is a reasonable level of risk.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

Besides blogging at TheStreet.com, Michael Thomsett also blogs at Options Money Maker, the Top Advisor's Corner at Stockcharts.com, and Seeking Alpha.

He has been trading options for 35 years and has published books with Palgrave Macmillan, Wiley, FT Press and Amacom, among other publishers. Thomsett's latest book is A Technical Approach to Trend Analysis.

He is working on a new book on options math, to be published by Palgrave Macmillan this year.

More from Stocks

Economist Perspective: Brexit Endgame in Sight?

Economist Perspective: Brexit Endgame in Sight?

Smaller Cap Stocks Could Make Great Stocking Stuffers Ahead of 2019

Smaller Cap Stocks Could Make Great Stocking Stuffers Ahead of 2019

Dow, S&P, Nasdaq Are All in Correction Territory Following Stock Selloff

Dow, S&P, Nasdaq Are All in Correction Territory Following Stock Selloff

Chart of the Day: The Cloud Kings Lost Their Crown in the Fourth Quarter

Chart of the Day: The Cloud Kings Lost Their Crown in the Fourth Quarter

Procter & Gamble Helps Lead Dow Jones After Upgrade From Morgan Stanley

Procter & Gamble Helps Lead Dow Jones After Upgrade From Morgan Stanley