Fertilizer stocks will soon enter a period of seasonal strength, and two stocks in particular look like attractive buys on any upcoming pullbacks.
Despite the stock market's impressive performance so far in 2012, some industry groups are still flat or down for the year. These are the groups to keep an eye on, as we have seen new sector rotation that has continued to propel the major averages higher.
The materials sector has been lagging and is still below the February highs. A strong close this week in the Select Sector SPDR - Materials (XLB) would turn the volume analysis positive and might be enough to make it a market leader.
The strong volume and positive close seen in the fertilizer stocks last Friday suggests that demand is coming into this group. These stocks are part of the commodity or agricultural chemicals group, which is now in a strong seasonal period, and I would look to buy on any setbacks.
Chart Analysis: The weekly chart of the Commodity Chemicals group shows a strong close last week, suggesting that a new uptrend (line b) has begun. A higher close this week would support the view that a bottom is in place.
- The seasonal trend analysis shows that this group typically bottoms around September 30 and peaks around May 6
- The seasonal trend shows a short-term low on March 9, which forms an uptrend, line c
- The break of this support confirms that the group is entering a seasonally weak period
- A break of the downtrend (line a) near 16.50 area will signal a move to the 20 area. This would be about a 20% gain
Agrium Inc. (AGU) closed last Friday just above the weekly downtrend, line a. AGU made a high in 2011 of $99.14, but traded as high as $113.88 in 2007.
- Minor upside targets in the $93.50 area with further targets in the $98-$99 area
- Weekly relative performance, or RS analysis, is above its rising weighted moving average (WMA) but still below the resistance at line b
- Weekly on-balance volume (OBV) has already broken out to new highs and is acting stronger than prices
- Volume was double the average daily volume on Friday, and the daily OBV (not shown) is positive
- There is initial support now at $84.50 with further support at $81.70-$82.50
The weekly chart of Mosaic Co (MOS) does not look as strong as that of AGU. MOS had an early-2011 high of $89.24, but traded as high as $163.45 in 2007.
- There is short-term resistance at $59.75, which was the February high
- If it is overcome, the 38.2% Fibonacci retracement resistance stands at $61.80 with the 50% level at $67.02
- The RS line is trying to bottom out, line e, and would look much better with a higher close this week
- The daily RS line (not shown) is above its weighted moving average
- Volume was strong on Friday, and the weekly OBV shows a potentially bullish formation after turning up from its weighted moving average
- A move in the OBV above resistance at line f would be very bullish
- There is first support at $56-$56.80 with more important support in the $54.50-$55 area
What It Means: As I wrote on Friday, the weekly analysis for the Select Sector SPDR - Financial (XLF) and Select Sector SPDR - Energy (XLE) has turned positive. This should be very supportive for the overall market, and if the materials sector can join in as well, it is likely to provide a better floor underneath the market.
The strong volume action is consistent with a short-term low, but any pullback may be slight.
How to Profit: For Agrium Inc. (AGU), go 50% long at $84.92 and 50% long at $83.84 with a stop at $80.76 (risk of approx. 4.3%). Cancel the order if $89.40 is hit first. Sell half the position at $92.66 and raise the stop on the remaining position to $85.72.
For Mosaic Co. (NYSE:MOS), go 50% long at $56.94 and 50% long at $56.14 with a stop at $53.72 (risk of approx. 5%). Cancel the order if $59.50 is hit first. Sell half the position at $62.42 and raise the stop on the remaining position to $56.72.
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