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It was a roller coaster of a ride on Wall Street before Tuesday’s Closing Bell managed to confirm a strong technical rebuttal to Monday’s price thumper, known as a follow-through day, or FTD. Bargain-hunting, investor optimism in front the Big Three’s “Round 2” on Capitol Hill and a better-than-feared update from General Electric (GE) were three of the early headline favorites for bulls. However, one name beneath the surface which may have prompted some buy-side interest, when all was said and done, could be found in shares of Mosaic (MOS).

Mosaic, an agricultural large cap that specializes in the production of phosphate and potash crop nutrients warned last night after the close. Management announced that due to weak market conditions, phosphate sales volumes were “800,000 tonnes” lower in its second quarter. Margins were also impacted. An average selling price of $525 per tonne fell below prior guidance of $560 - $620 was realized due to high cost raw materials used in the production process. The company also decided it was wise to withdraw its fiscal 2009 sales volume guidance, citing uncertainties over the global economy.

“Feed the bull?” After finding shares pressured rather aggressively last night, traders ultimately responded with a “Buy the news” type reaction. By day’s end, MOS managed to tack on 1.76 to 27.16 on stronger and well-above average volume. Some of that price action can be seen below. More important, the monthly view shown is a classic case study of how momentum investment toys can get quickly unwrapped in a bad sort of way. The technical tea leaves shown emphasize why it’s vital to scale out before the story of never-ending growth and in sync price action make a turn for the worse.

In more recent days of the past two months MOS does appear to be making the case for higher prices. The mostly loose lateral action comes after a nasty 85% plunge from highs and looks to be finding support just above (loosely as well) prior highs. The size of the percentage price shellacking on a stock, which mind you, is still a large cap issue—has more than fulfilled the 70% technical schnitzel i.e. profit-taking, most prior growth leaders experience after an outsized price run. While it wouldn’t have been any fun being a bull on the way down, the action does suggest that leaner times are here.

 

Figure 1: Mosaic (MOS) Monthly

Option volume was active but slightly less impressive than the volume increase in shares of MOS. On the session, just more than 19,000 contracts traded versus a daily average of 17,900. Additionally, while the shares reversed higher within the current base, the put / call ratio spiked away from its normal and near 2-to-1 bias in favor of the calls to roughly a 1-to-1 situation. Net, net the calls outpaced the puts by a margin of less than 10% in establishing a reading of 0.92.

Could the increase in put activity be a contrary indicator and bullish in and of itself? That might be considered, although the net action may have been the work of premium sellers too. Implieds spiked in Monday’s session in conjunction with the broader market and similarly, found lower levels today. However, premiums remain well below the statistical movement of shares, which have seen readings upwards of 300% during the market’s broad-based correction.

Combined, it doesn’t seem farfetched the action is the result of more aggressive premium sellers. In Tuesday’s session, the largest contract volume was spied on the out-of-money March 17.50 Puts. A bit more than 2,800 traded before closing mid market at 2.57 on implieds of 135%. Several prints ranging from 2.60 to 2.70 made up the bulk of the volume entering the final hour of trade.

When scanning the rest of the board and seeing 1,000 June 25 Puts priced at 7.20 had traded on the day, my thoughts were a trader may have put up a diagonal front or ratio spread. Using a 2.8:1 ratio and closing prices, the spread could be done for essentially even money. Digging deeper into the actual prints though and it was quickly determined the diagonal ratio spread was a figment of my own imagination.

That being said, if I was to make a guesstimate, I’d say the March 17.50 puts were the handiwork of bulls looking to play a potential bottom. At the same time, I’m a bit less convinced as to what went on in the June Puts. However, I’m “Obamaistic” the action represents a bullish “Mosaic” for a market and economy still on edge and one we’d like to see moving to the beat of a different drummer.


Chris Tyler
Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
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The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual. 

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