On my last visit to the DuPont Company (DD), I wrote an article with the theme that the stock would be range-bound to bearish through mid-2013. At the same time, I suggested a short-term income play using bearish options. This is what I wrote:
------------------------------------------------
The Options Play
The stock is presently trading at $43.72 and will be hard-pressed to move up at this point. Not only is the stock very weak, but there are major elements to deal with, including the European debt crisis and our own "fiscal cliff." Both of these elements will have a negative effect on the markets. I like a credit spread play for December.
- Sell the December 2012 call with a strike of "47" (priced at $0.18)
- Buy the December 2012 call with a strike of "46" (priced at $0.11)
- Net Profit: $0.07
- Maximum Risk: $0.97
- Maximum Length of Trade: six weeks
Reasoning Behind the Trade
- The stock is a bearish play against the trend on a credit spread.
- Strong resistance at 46.5.
- You'd be hard-pressed to find a catalyst to move the stock up at this point.
------------------------------------------------
I closed out this play in early December when the stock dipped just below '43' with a nice profit. I expected the stock would be hard-pressed to move up, and my observations were correct. Now I want to know if the stock will continue to move up like it has since the first of December. Is the downtrend over, or is this just a hiccup on a longer trend down? Originally, I saw no catalyst to make the stock move up.
Where is DuPont Going?
Citigroup reiterated its Neutral rating on DuPont, but lowered its price target from $49.00 to $47.00. Obviously, with lower expectations on price performance, should one be bullish on the stock? Part of the struggle with the lower pricing has to do with one of DuPont's products - TiO2 (titanium oxide). Pricing for the product has been lower and global de-stocking is the norm right now. At the same time, titanium ore is getting more expensive and consequently tightening TiO2 margins for the company.
Management has been pessimistic and is tightening spending because of the fiscal cliff and global uncertainty. The manifestations of global challenges persist for DuPont. With leadership changes taking place in China, infrastructure projects are lagging, affecting the company. A poor third quarter destroyed the company's gains with major declines in PV materials along with an eye-popping 28% decline in electronics and communications.
The company is known as a global chemical giant. Recent moves have made strides to become more focused and less broad based. The recent acquisition of Danisco and selling its coating division is just the start. During this change, the weak chemical markets continue to wreak havoc on the stock. DuPont has been cutting costs in Europe due to weakness in the region, pests have been eating their way through profits, Monsanto (MON) won a $1 billion lawsuit against them for patent infringement, and they have been using a lot of debt to assist cash flow over the past few years.
(click to enlarge)
Technically Speaking
After the huge gap down in early November, the stock has formed a "w" pattern and has now reached the resistance level we would like to see a breakout occur. It is strongly bullish as the upper Bollinger Band is being hugged and this last move off the band has the stock moving sideways. A show of strength! The RSI indicator continues to move up and has plenty of room to continue to move up. The MACD, MAs continue to stand wide apart and have just reached bullish territory. All indicators point to a strong move up to continue.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
