ConAgra Foods Inc. (NYSE:CAG) is a low beta (0.47) slow mover. However, there is a redeeming quality to its trading pattern. After reversing at key pivot points, it typically maintains a consistent directional move. In this case, ConAgra Foods has been on a consistent downward trend since mid-January. I have included the blocks in the data block matrix to authenticate the impetus for the subsequent decline.
It is critically important for investors to understand that if a Designated Market Maker wishes to lower prices on light volume but incurs heavy selling at the midway point toward his downside price objectives, that volume will usually manifest itself as large blocks. Once he is able to stave off the selling pressure, he will reverse the direction and rally his stock to unload the inventory he just acquired. Large blocks and/or heavy volume will again define the upper price limits where he will once again reverse the trend in order to resume the decline. (Of course the opposite is true as well). This is what I believe has occurred in this issue. However, rather than resuming the decline, he will advance this issue from these current levels. I believe this to be true because of the size of the blocks which traded on July 19 & 20.
That said, I anticipate a double bottom. In addition, the first up-leg is complete. The double bottom is orchestrated to stop the sell-off which usually accompanies falling prices. As you can see from the chart, a considerable amount of stock was absorbed by the Designated Market Maker in this issue on July 19, 20 & 23. Additionally, the blocks which occurred on July 19 and July 20 were not only very large; They traded at key price points.
I suspect that these trades are indicative of the Designated Market Maker or some other market heavyweight, establishing a long-term capital gains position and that the first leg-up in this double bottom has been supplied by shorting. This will necessitate a short-term reversal in order for him to cover his short positions. Another very interesting and rather obvious fact is that the volume has subsided significantly. This lack of demand comes as no surprise since the stock price has been in decline since January. More to the point, the selling pressure has subsided. This is exactly what I suspect the Designated Market Maker wanted in this instance. He has most likely captured the tradable float.
Since one of the principal tenets of my thesis is that the stock market is a merchandising enterprise, then one would need to be acutely aware of wholesale and retail price levels. As I have said on numerous occasions, that is the most difficult aspect of trading. The reason being: It is a moving target.
Here is the part that confuses most investors. When ordinary retailers conduct a sale, they lower prices or offer buy one and get the second one for a penny, etc., etc., etc. However, when the Designated Market Maker conducts a sale, he raises the price because it is rising prices that create demand. This concept is diametrically opposed to everything that investors have been indoctrinated into believing with respect to marketing. These guys are playing chess while investors are playing checkers.
As you can see from the chart, ConAgra Foods rarely trades a block without a corresponding move in price. I am fairly confident (but not certain) that the blocks in January were most likely a distribution at the top and the block in February was the short. If you carry this logic to its reasonable conclusion it could be reasoned that the two blocks in July were the cover and an accumulation. There could and probably will be a shakeout this week but the importance of this merchandising stance by the Designated Market Maker cannot be overlooked.
This is without a doubt an indirect commodities play. Food prices are going up and everyone has to eat. We will see the simplest of all economic principals applied. The principal to which I am referring is the Incidence of Taxation. ConAgra Foods will simply pass the higher cost on to consumers. Suppliers of food commodities have the ultimate leverage: Hunger.
Once this phase of the merchandising cycle (double bottom) is completed, I expect ConAgra Foods will advance to the $26.00 to $27.00 range. That is where the blocks in January of this year traded. I believe this issue could go higher. Nevertheless, I will be well satisfied to exit the trade at $25.55. Of course I will be watching for "Control Blocks".
On the basis of the foregoing these are my views and observations:
I recommend establishing a long position in ConAgra Foods Inc. Open your position with only 1/4 of whatever capital you intend to commit to ConAgra Foods Inc. at $24.13 or lower. Purchase the remaining 3/4 of the position at $22.20 and stop out at $21.29. Do not post your stop out. I have said it before but it is so important that at the risk of being redundant and in an abundance of caution I will say it again. It is too easy for the Designated Market Maker to cash investors out by moving the price above or below your stop out and move the price right back down or up again. In addition, when a stop out is triggered, it converts into a market order and that could be disastrous if the Designated Market Maker decides to really take advantage. Remember the "Flash Crash"? I would be looking to exit the trade at an upside price target of $25.55. Do not allow this position to exceed 5% of your overall portfolio.
There is always the possibility that the trade may not work out.
There Is Never A Sure Thing (particularly on a short)
Investors must realize and recognize that there is never a sure thing. Sometimes events that have a low probability of occurring bring forth very serious consequences should they come into being. Investors must judiciously consider what the inherent practical limits are and how much they stand to gain in relation to the risks involved in establishing any position.
In addition, persistence can become desperate folly by allowing a losing position to become a viable argument for deciding on a new position. Rather, such decisions should be based on the current and soon-to-be circumstances.
Any position in which one unexpected factor has a significant impact on your portfolio is the result of poor planning. It is a fault most commonly associated with people who want to explain away their losses. SUN TZU -Art of War "Use an attack to exploit a victory, never use an attack to rescue a defeat."
If you follow the process recommended and the trade does not work, the overall loss in this model is $3,000.00. That amounts to 0.3 of the overall portfolio (theoretically valued at $1,000,000).
And finally, never be a brave and brainless investor because a fool and his money are soon parted.
A portfolio of $1,000,000 should position size in the following manner.
This is a trade, not an investment. Be ever vigilant.
That's it for now…. Have a nice day.