Deere & Co. (DE) rocketed to an all-time high in triple digits this week after beating fourth quarter EPS estimates by a wide margin and raising fiscal year 2017 guidance. The rally underpinned the entire agricultural sector, lifting rival Caterpillar Inc. (CAT) and beaten down chemical producers including Potash Corp. of Saskatchewan (POT). Despite the euphoria, the company expects lower sales next year due to slower China growth, a weak dairy sector and reduced EU demand.
Is it safe to pick up DE shares at these lofty levels or should you wait for a pullback that shakes out weak hands? At first glance, the breakout looks like the real deal, setting the stage for much higher prices in coming months. However, accumulation-distribution indicators tell a different tale, signaling inadequate sponsorship that’s likely to trigger whipsaws and downdrafts before rewarding late-to-the-party shareholders.
DE Long-Term Chart (1993 – 2016)
The stock rallied out of a basing pattern near 6.00 in 1993, entering a strong uptrend that continued into the 1998 high at 32.06. It turned lower into the new millennium, missing out on the last wave of the dot.com bull market, and settled in a range with resistance at 24 and support in the mid-teens. A 2003 breakout cleared those levels but buying pressure failed to gain steam until 2006 when the rally took off in a momentum wave, lifting price from 28 to the mid-90s in just over two years.
It turned sharply lower with world markets during the 2008 economic collapse, dropping all the way back to 2003 support in the first quarter of 2009. The subsequent recovery wave unfolded at the same trajectory as the prior decline, completing a 100% V-shaped rally into the 2008 high in 2011. Sellers then took control once again, yielding a higher 2011 low, followed by four failed breakout attempts into the middle of 2015.
The bottom dropped out into early 2016, dumping the stock to a 3-year low at 70.16 that added a second higher low to the long term price structure. It made quick progress after bottoming out in January, jumping from 71 to 86 in just six weeks, but added just six additional points between the March peak and this week’s high percentage buying spike.
Weekly and monthly Stochastics lifted into overbought levels after the earnings report, in line with the big rally, and could hold bullish buy cycles into year’s end. However, the uptrend has reached resistance at a two year rising highs trendline (red line) while testing the 100 level for the first time in its public history. This triple digit divide can act as a magnet for months, attracting sellers above the magic number and buyers below it.
DE Short-Term Chart (2014 – 2016)
The 2015 breakout attempt ended with a high volume August breakaway gap that was finally filled earlier this month. The stock posted two lower lows into the first quarter bottom and two higher lows into the summer months, leaving behind a rounded pattern that’s built several tiers of support. However, it hasn’t pulled back to consolidate gains since bouncing at 80 in September, raising odds this week’s gap will fill before rewarding breakout buyers.
On Balance Volume (OBV) also advises caution with new long positions, ending a long distribution wave in August 2016, even though price bottomed out seven months earlier. It’s gained substantial ground since that time but has just reached the 0.618 retracement of the prior decline, signaling a bearish divergence that predicts mixed price action in coming months.
The Bottom Line
John Deere rallied to a new high after this week’s earnings release, attracting a sizable crowd of breakout buyers, but is unlikely to book substantial gains above 100 before it rolls over and shakes out weak hands. As a result, the best entry strategy is to stand aside for now and wait for a substantial pullback.
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