2 Key Levels to Watch for ADM Option Bears

ADM has come within one standard deviation of its 120-day trendline

by Bernie Schaeffer

Published on Jun 2, 2020 at 9:25 AM
Updated on Jun 24, 2020 at 10:16 AM

Last week, at Schaeffer’s we dove into how the S&P 500 Index (SPX) is behaving during the current market turmoil, specifically exploring what, if anything, we could expect going forward. The analysis used an oscillator index called the Choppiness Index, and showed how the S&P 500 has performed based on specific key levels, including various spikes and brackets. Below, I will explore a similar sentiment, but hone in on a specific stock, as well as its bearish indicators that could be signaling traders to use a mode of caution in the coming weeks/months.

Specifically, our bearish filter finds stocks that are running into a notable moving average that has acted as proven resistance over the past three years. Using the average Schaeffer’s Volatility Index (SVI) rating over the past few years and the average return after running into said moving average, our Senior Quantitative Analyst Rocky White, found the expected put option return over the coming 10 and 21 days.

Zeroing in on agriculture ingredient processing name Archer Daniels Midland Co (NYSE:ADM), the equity has come within one standard deviation of its 120-day moving average, signaling runups to this particular trendline four times in the past three years. Ten days after each of these run-ins, the stock averaged a drop of 4.6%, with no returns positive, and the same is echoed for ADM’s 21-day return. A drop of this magnitude from the security’s Thursday close of $39.00 would put Archer Daniels Midland stock at $37.21, nearly spot-on its 80-day moving average.

CotW ADM Chart May 29

As mentioned above, ADM’s SVI is running low, its ranking of 29% sitting in the 11th percentile of its annual range. This suggests that near-term options traders are pricing in relatively low volatility expectations -- a boon for bears looking to make a move on the equity.

Meanwhile, analyst attention is leaning bullish, signaling the stock is well overdue for a fresh round of downgrades and/or price-target cuts. Heading into Friday’s trading, four of the seven covering firms sport a “strong buy” recommendation and the stock’s average 12-month price target of $46.00 comes in nearly 20% above current trading levels.

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, May 31.


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