CF Industries: From Boom To Bust – Sell Into The Rallies

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CF Industries: From Boom To Bust - Sell Into The Rallies
CF Industries: From Boom To Bust - Sell Into The Rallies

CF Industries (NYSE:CF) stock was also hammered as the market continued to distribute the massive gains from its 2020 COVID bottom. In a May article on Mosaic (MOS), we cautioned investors that the market has been setting up the trap. We also highlighted similar price action structures in energy stocks such as Occidental (OXY) and Exxon (XOM), urging investors to take their profit (here and here).

In addition, the feedback that we received in our comments stream further corroborates our perspective that investors have gone gaga over such stocks, akin to highly optimistic sentiments (warning sign).

Our price action analysis also indicates that the market has been distributing CF stock since March, shortly after the start of the Russia-Ukraine conflict. It has been drawing in dip buyers astutely. Two significant bull traps, including a potent double top bull trap, emphasized the market’s significant rejection of buying momentum. Coupled with its distribution phase, it highlighted the market’s intention to force further selling, moving ahead.

Notably, CF stock is struggling at its near-term bottom after the recent sell-off. The market could continue to distribute further or force rapid selling soon (the duration is hard to predict). Therefore, we urge investors to consider layering out/cutting exposure soon, using potential rallies to cut more before it goes into the rapid liquidation phase.

CF Stock – Don’t Ignore The Double Top Bull Trap

CF price chart (monthly)

CF price chart (monthly) (TradingView)

Poring into its monthly chart, we can glean the significant bull trap formed in March/April. Such parabolic moves are consistent with price action structures that indicate that the market had drawn buyers rapidly into the set-up. However, the market could use a distribution phase (duration is hard to predict) to draw in more dip buyers at the top before moving into the rapid liquidation subsequently.

We believe that CF stock is now mired in such a distribution phase that has taken place over the past three months.

CF price chart (weekly)

CF price chart (weekly) (TradingView)

Zooming into its weekly chart, we can clearly observe its distribution phase. Saddled with two bull traps, including a potent double top (formed in April), we believe the stage has been for an eventual sharp decline.

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Notably, the stock broke down its near-term support (which could turn into its near-term resistance if it does not retake). Our analysis suggests that CF stock could continue to distribute further along the current levels, allowing the market to draw in more dip buyers. However, we don’t encourage investors to buy the dip here, given the potency of its double top bull trap.

Instead, we urge investors to consider layering out/cutting exposure and use potential rallies to sell even more positions.

Caution: CF Industries’ Growth Is Likely To Peak in FY22

CF revenue change % and adjusted EBIT change % consensus estimates

CF revenue change % and adjusted EBIT change % consensus estimates (S&P Cap IQ)

The Street’s consensus (generally bullish) is modeling for CF’s revenue and adjusted EBIT to peak in FY22, before falling precipitously from FY23. Therefore, investors need to ask themselves why they should factor in another massive revenue increase if even the generally bullish Street analysts don’t think so.

As a result, it would likely affect CF valuations as its free cash flow profitability would likely be impacted. Given the forward-looking perspective of the market, we believe the early warning sign from its double top bull trap is clear.

Is CF Stock A Buy, Sell, Or Hold?

We rate CF stock as a Sell. As mentioned, it’s at a near-term bottom, so a potentially short-term rally (dead cat bounce) could occur. But, we urge investors to use such potential rallies to reduce exposure.

CF’s price action structure is looking increasingly perilous, and we believe a rapid liquidation could happen after the completion of its distribution phase. So, don’t wait until then to sell.