What Does Monsanto's Reversal Really Mean? (MON)

Shares of Monsanto Co. MON jumped higher this morning, touching $74.43, only to be sold off hard and heavy throughout the rest of the trading day. Currently, shares are off by 2.26%, trading at $71.41.

Given that the previous close for MON was $73.06, today's action can be summed up in two words—reversal pattern. This is when a stock gaps higher above the previous close only to sell off and close below that previous close. It is also known as a bear-engulfing candle. Throw in the facts that shares could not breech its recent high of $76.69 and now look to be respecting a bear trend-line and you have a recipe for a stock that could move much lower.

How much lower? Well, lets look at a longer-term chart. Over the past two years, shares have shown a huge break down through the $70.00 level, when they plunged lower and hit $46.91. Since then, Monsanto has largely been rallying; the fact that they were able to rise above that $70.00 resistance level was the first indication that shares had the ability to move sharply higher.

However, with a short-term bear trend in place, if MON cannot continue to hold that $70.00 level, it would be a strong indication that the stock's recent breakout was false and bull support could erode rather quickly.

While shares would likely not revisit their paltry lows around $45.00, a retracement to $60.00, could be in the cards and (I believe) would be bought hand-over-fist by Bulls.

So…what's the trade?

A great way to voice the above thesis would be to buy the July $67.50/60 1x2 put spread for a net debit of $0.20. This trade would benefit from erosion in near-term bull support, while getting you long the name at a much more reasonable (and technically viable) price level.

Monsanto Company, along with its subsidiaries, is a provider of agricultural products for farmers. The company's seeds, biotechnology trait products, and herbicides provide farmers with solutions that improve productivity, reduce the costs of farming, and produce better foods for consumers and better feed for animals.