Deere & Company (DE) missed fiscal third quarter estimates by 16 cents in Friday's pre-market, reporting earnings per share of $2.59 while warning that fourth quarter revenues would miss consensus by nearly 10%. The bearish metrics triggered a strong sell-the-the-news reaction, dropping shares of the agribusiness giant nearly 4% to a three-month low and into a test of the 2018 low at 131.26.

The company noted that demand for agricultural and construction equipment remained exceptionally strong, despite "tensions over global trade and other geopolitical issues," lowering shareholder anxiety triggered by tariffs on soybeans and other U.S. crops. Deere expects equipment sales to rise about 30% for fiscal 2018 compared with 2017, generating a tailwind that could ease short-term volatility. (See also: 6 Stocks at High Risk in a Trade War.)

DE Long-Term Chart (1990 – 2018)

 

An uptrend ended at $13.05 in 1990, giving way to a multi-year decline that found support near $6.00. It returned to resistance in 1994 and stalled for two years, ahead of a strong trend advance that topped out in the low $30s in 1998. The stock ran in place at long-term support during the internet bubble bear market, returning to the prior high in 2004. It spent more than two years testing that level, finally breaking out in 2006 and taking off in a vertical impulse that reached the mid-$90s in 2008.

The stock plunged during the economic collapse, giving up more than five years of gains before finding support on top of the 1998 high in March 2009. The subsequent recovery wave unfolded at the same trajectory as the prior decline, completing a massive V-shaped pattern in 2011. The uptrend then ended, giving way to a 40-point trading range that remained in force until a 2017 breakout generated gains in excess of 70% into January 2018. 

Price action completed a four-month double top breakdown in March 2018, triggering a decline that ended at the 200-day exponential moving average (EMA) near $130 in May. A bounce into June mounted the broken top and then reversed, trapping bulls in a decline that has just reached the May low. This downswing completes a larger-scale double top pattern, raising the odds for a breakdown that reaches 2017 breakout support in the mid-$90s (black line). (For more, see: Deere & Co.: How It Makes Money.)

DE Short-Term Chart (2016 – 2018)

 

A Fibonacci grid stretched across the uptrend since 2016 organizes price action, placing the .382 retracement level at the 2018 low and double top support. A strong bounce is possible at this level, but the trendline of lower highs (upper blue line) marks a powerful barrier, with a reversal shifting the pattern from double top to equally bearish descending triangle. That line also reveals the interface between bull and bear power, with a breakout forcing short sellers to cover positions while signaling an end to the correction.

Conversely, a breakdown through double top support at $131 would favor a measured move target equal to the height of the pattern. The 44 points ($175 to $131) predict a sell-off to $87 ($131 – $44 = $87), but the 2017 breakout at $95 (black line) marks exceptional strong support that is likely to attract committed buying pressure. It's also narrowly aligned with the .786 retracement level, which often ends major corrections.

An on-balance volume (OBV) distribution wave found support at the 2011 low in 2016, setting the stage for healthy buying pressure that reached a new high in November 2017. The volume uptick stalled after the February 2018 high, entering a mild but persistent decline that reflects profit taking rather than aggressive selling pressure. However, the downturn is likely to escalate if the stock breaks $130 to $131, setting off all sorts of technical sell signals. (For more, see: Uncover Market Sentiment With On-Balance Volume.)

The Bottom Line

Deere and Co. has sold off to the May low and now risks a double top breakdown that could drop the stock more than 25%. (For additional reading, check out: Analyzing Chart Patterns: Double Top and Double Bottom.)

<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.