Charts

A chart of MOS - Click to enlarge

A chart of CF - Click to enlarge

A chart of POT - Click to enlarge

A chart of MTL - Click to enlarge

Buy low, sell high

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We could use the chart of any uptrending stock for this post, but we've chosen the chart of Mosaic (MOS) to demonstrate the importance of your buy timing. To make this point, let's assume that MOS reaches the bottom of its channel (111) tomorrow.

Now, if one were to have bought MOS above the top of its channel in January, they would have paid about $110. After 3.5 months, they would be breaking even, after a very stressful ride.

Instead, had they waited 5 days and bought below the bottom of the channel instead, at $72, they would have made 100% in just 3 months, with nearly no stress.

So there you have it. Buying at the bottom of the channel vs. buying at the top... a 100% difference.

We're betting that all of these fertilizer stocks make new highs later this year, and are using this most recent selloff as an opportunity to scale back into them. After all, considering their stellar charts, their p/e's are not at all outrageous. We will turn our SMN profits into additional shares of one of the fertilizer names when and if they capitulate. We're hoping we get this capitulation tomorrow afternoon (or in the days ahead), after Bernanke reports that we've seen the last of the rate cuts for the forseeable future.

We are not concerned that the Ag names are correcting in the abscence of a broad market selloff. They simply overdid it on the upside, and will now overdo it on the downside. It's just the nature of the investors/traders playing these names.

Solar sector (SPWR)

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We currently hold no solar names, but have been watching them for a move... one way or the other. SPWR now threatens to break below recent support, and other solar charts look similar. We can buy the cup and handle consolidation pattern in this sector, but think that a break of support is more likely over the short term than a continuation of the rally. If we held these stocks, we'd be watching SPWR and STP closely, because these are the two names with the most defined support levels. ESLR has already given back much of its recent rally.

Commodity Raid

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We took some profits yesterday morning in CF because we had bought it at the halfway point of the channel (130's), and by early yesterday it had made it back above the 3/4 mark... quite a move. We're still holding CF, MOS and AGU. We're hedged with SMN (see chart above). It is more important than ever to hold SMN now because the reward far outweighs the risk at this point. If the Fed hints that the rate cuts are over for the time being (which looks likely), there could be a raid on commodities. AGA also offers protection against Ag longs, but it is thinly traded, and has only a few days of trading history. We're going to add some SMN today, hoping for an Ag correction after the Fed's decision at 2:15 tomorrow (Wed).

In our opinion, the stimulus checks will do nothing more than offset the higher gas prices for most Americans. And that's just gas for their cars. It will not help buffer the higher cost of heating their houses next winter. The stimulus checks will likely help us avoid recession by artificially boosting our GDP just enough to skirt the standard definition of recession, but it will do little to help the real economy. We feel that Americans will be strapped for cash for at least another year, if not longer. We put the entire war on our credit card, so why not just put the recession on it too? Irresponsible debt is exactly what got us into this mess, and now an increase in irresponsible debt is going to get us out of it? How does that work?

Following the dramatic selloff we saw in January, there are billions of dollars on the sidelines waiting to get back into the market. So while the economy suffers, the market may not fully reflect the weakness in the economy. Still, we're in the camp that thinks the market will close well below 14,000 this year.

Solar correction?

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The chart above is of STP. It has broken recent horizontal support, and looks as if it may soon test its 30dma, which this stock responds well to. Other solar charts look similar. We're not calling for a solar correction, especially with the S&P on the verge of breaking through 1400, but anyone in solar should watch STP carefully. If it breaks the 30dma, it could pull the others down. The S&P is likely to break 1400 because the Dow, the Nasdaq, and even FXI have already broken their resistance lines.

CF Industries (CF)

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CF is approaching more reasonable levels (center of channel). They report after the bell today. We have a position in CF despite earnings coming out tonight because the position is only about 30% of what we're trying to accumulate and it is sufficiently hedged.

If the stock continues to sell off today (into the 120's), we'll be adding more, along with adding to SMN. Following POT's report this morning, we have no qualms about the intermediate term fundamental strength of this sector. Today should not be seen as a reversal of trend, but rather an opportunity to begin reaccumulating long positions in these names.

Mosaic (MOS)

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MOS has returned to the center of its channel, and CF has reached the 2/3 mark of its channel. We did some initial buying back into the Ag space this morning. We now have 35% of our desired position, reflecting the approx location of these names relative to their channels. POT still remains too lofty, so we haven't pulled the trigger on it yet. If these stocks continue to sell off, we will be adding more later in the day. POT's earnings report this morning was strong. The selloff is not based on its report, it's simply based on where the stock was trading ahead of it... very overbought.

Of course we remain hedged with SMN and will be adding more if we do any further buying.

In a totally unrelated note, LDK has broken the first of its supports today in the 30.6 area. The next support to watch is a close of the gap, which would require for it to move below 30. It's close today is what will decide if it's broken these levels. At this point, it's really a news driven stock, not a chart that really lends itself to technicals. On that note, LDK reports on 5-12.

Triangle (CHNR)

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Thanks to Clarke for a heads-up on CHNR's consolidation pattern. The chart at the top is a weekly chart of CHNR that shows two massive breakouts following long term consolidation triangles. The first such triangle took 2.5 years to form, but the wait was worthwhile. CHNR shot up about 450% when it finally did break out. The second such triangle "only" took about 1.5 years to form. Again, it was worth the wait, as the stock rallied about 400% on the eventual breakout. The chart in the middle shows CHNR's current triangle. It's an infant at only 6 months in the making. The tops of these triangles are nearly impossible to draw accurately. It may be the case that CHNR takes another 6 months to a year to consolidate, which is why we've drawn more than one resistance line. Only time will give clarity to where the line should be drawn.

Here's how to play it: set an alarm to sound when CHNR breaks $26, and another when it breaks $28, and another when it breaks $29 and $30. At some point, there will be a day when volume explodes to several times its average daily volume, and your alarm will sound. When that happens, you've got a good risk/reward ratio for a longside trade. If you are serious about trying to capture this stock's next move, we suggest that you look back at daily charts of its previous breakouts to see that the breakout doesn't necessarily happen all in a single day.

The chart at the bottom is actually a chart of GOOG. After over 1.5 years in a similar triangular consolidation pattern, GOOG broke out in September 2007. After being hit 7 times, there were few investors in GOOG that were not aware of this line. We just bring this to your attention to show that these long term triangular consolidation patterns form in all kinds of stocks, from low volume, less popular stocks to the most visible of them all.

Ag opportunity?

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Just added a layer of CF in the 144's. Earnings are due out tomorrow for POT and CF, so we're only adding small layers today. The more Ag pulls back, the more we'll add. Still holding SMN of course. From a longer term viewpoint, today could be a great buying opportunity even if the stocks continue to sell off after earnings. The closer CF gets to the center of its channel, of course the less risk there is in buying into it. See chart of CF above. We'd like to get into POT, but it would have to drop quite a bit further. That name in particular is overextended considering its large market cap.

Infrastructure (CBI)

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The chart at the top shows the recent breakout in infrastructure stock Jacob's Engineering (JEC), which reported a strong quarter this morning. It broke through both its 100dma and its resistance line simultaneously a few days ago. The chart below it is a chart of Chicago Bridge and Iron (CBI) which looks like it is on the verge of breaking its 100dma and its resistance line very soon.

This is another fun trade where one should not bet the farm, despite the strong underlying fundamentals in this sector. It is important to remember that the S&P itself has yet to break out above resistance at 1395/1400, and that the Dow is only about 300 points away from its 200dma and 1,000 points away from support at 11700.

It seems that in order to be making any real money in this market, one needs to be in potash based fertilizer stocks, steel, or energy (coal or oil).

Any aggressive buy in the potash space should be hedged ahead of POT's report this Thursday.

DSX breakout

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The drybulk breakout is slow, but at least it's happening. If DSX continues higher into the close, today's move will look impressive on a daily chart. We bought DSX instead of DRYS because DSX had the more defined resistance line, and was trading just below its 100dma. With both of these areas of resistance being broken simultaneously, it had better prospects for a decisive breakout than DRYS did.

We bought back into CF today at 155, trying to make a few points... again. On one of these iterations, we'll be left holding the bag. We've suceeded with this same trade so many times, though, that we have enough profits to risk holding this small position through 30 points of downside. We also have SMN, so there is no risk in buying up here.

Thursday is a big day. Both POT and CF report earnings this Thursday. POT reports before the bell, and CF reports after the bell. Normally we would lighten up or sell completely before the reports are released to avoid being Crox'd. We may hold a small amount of CF through the report thanks to the protection SMN affords us, but we will not be making any large bets ahead of it either way. How much we hold through the reports (if any) all depends on where the stocks are trading just ahead of their release.

The Dow - 200dma

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Clearly a decisive breakout for the market on Friday. Next stop... 200dma. The 200dma shown on the chart of the Dow above is at roughly 13100 (approx 250 points away). While a bull market is running, the 200dma is of little use, as the market tends to stay well above it. But in times like this, it is used to mark major changes in direction. Despite how strong the recent rally has been (1100 points in six weeks), all of this strength can just be categorized as typical bear market action as long as the market remains below its 200dma. Considering that half of that 1100 point rally took place over the past 4 sessions (550 points gained since last Tuesday), the market is quickly approaching a short term overbought level. If we do get to the 200dma this week, we're going to dump all longs and just hold shorts (adding a large position in DXD). We typically hold longs and shorts at all times. But when the market adds 800 points in under 2 weeks, we feel 100% comfortable holding nothing but shorts. There has been a lot of confidence restored to this market. Sentiment is positive, and even returning to speculative. Still, nothing goes straight up.

It's important to note that while the Dow broke resistance, the S&P500 reversed course on Friday at exactly its early February highs of 1395. Those that follow the S&P are actually looking for a break of 1400. The S&P500 did break its 100dma on Friday, but the Nasdaq turned around just shy of its.

We're awaiting a breakout in the drybulk sector (which we realize may never actually happen), and are awaiting a pullback in commodities (agriculture in particular). We feel confident adding to SMN if it drops further. All it takes is one day of fear in the commodities market and SMN pays off.

Drybulk Sector

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Thanks to one of our contributors, Clarke, for pointing out the pending breakout in the drybulk sector. The chart at the top is Excel Maritime (EXM), which has recently made a decisive break through its trendline and moving average. The second chart is Navios Maritime (NM), which has yet to break out, but considering it is just below its 100dma and its trendline, a breakout may be imminent.

Of more interest to us than EXM and NM are the bottom two charts. They are larger companies, and are two of the three leaders of the sector. The first one (third chart from the top) is Eagle bulk shipping (EGLE), which broke through its resistance line yesterday. That brings us to the trade we're most interested in within the drybulk sector... Diana shipping (DSX).

The bottom chart shows DSX just below its resistance line and its 100dma. If EGLE and EXM are any indication of the near term future of the drybulk sector's performance, DSX is well positioned to explode to the upside.

For those new to the drybulk sector, it is important to also watch Dryships (DRYS). We prefer DSX, but it should be known that DRYS is a major player in the space.

Another thing to note here is that while the positioning of moving averages is uniform across the world of technical analysis, trendlines may vary by user. They are guidelines that are often very influencial, particularly if they are long in the making and particularly if they are horizontal. But their influence depends on how many traders recognize them, so the less obvious and shorter ones should be given less consideration. The one we see on DSX is fairly strong, because it's been hit multiple times, and has taken nearly 6 months to form. It is not horizontal, though, like the one you see on a previous chart of Pulte Homes (PHM). These are just things to consider when reading charts. While helpful, technical analysis is an art, not an exact science.

Today, the market will no doubt break through its resistance at Dow 12750 (S&P 1400). Whether or not it will close above it or not is another story. Considering earnings season has not pummeled the market, we have to believe that if the largest potential negative catalyst for the market is not pulling it down, people are getting back into their speculative stock-buying mode. We're going to join them with some of these fun trades, like we did with DE the other day. These positions do not meet our criteria for market cap, uptrends, institutional sponsorship, popularity, etc, but they are fun trades that will not become core positions. Our core positions remain the Ag names, which have all of the qualities that we look for to constitute the largest portion of our portfolio. At this point, we are going to drop the rest of the DXD we have, which will leave us with only one Ultrashort, SMN. We are going to continue to hold SMN for as long as we hold long positions in the Ag names.

We'll have to check back later to see how drybulk shapes up. We're going to buy DSX if it breaks resistance today.

Homebuilders

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After breaking out of their downtrends in mid January, the homebuilders have been forming large ascending triangles. The chart above is of Pulte Homes (PHM). The charts of Hovnanian (HOV), and Lennar (LEN) are very similar. They have been rejected multiple times at their resistance lines, yet are making higher lows. The more horizontal a resistance or support line is, the more significant a break of it is. We are not watching these charts for a break of support, but rather for a break of resistance. Considering the lines are converging, they will have to make a move soon enough.

The longer these stocks stay within their triangles, the more significant (and more explosive) their eventual breaks will be. Considering how large these triangles are, their lines don't fully converge for another 6 weeks. The breakout (or breakdown) will happen sooner.

Financials (UYG)

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Thank you to one of our readers for commenting on UYG. It's tempting to dive into the "cheap" financial stocks, but it's premature from a technical standpoint. The chart of UYG (an Ultralong financial ETF), shows that the financial stocks remain within the throes of a downtrending channel, trading below a downtrending moving average.

It's no suprise that most of the financial stock's charts look similar. Check out the charts of MER, C, GS, MS, PJC, BAC, too many to list... all locked in a downtrend.

We'd like to see a decisive break through the top of the channel and the moving average before even considering that financials may have seen a bottom. Until then, we have no interest in any of these names.

We've used a 75dma on this chart. While it is not typical, you must use a moving average that matches the stock's chart, just skimming over its peaks (or under its valleys). Once the 75dma gets conquered, then we'll look for a break above the 100dma. It isn't until a stock is trading above an uptrending moving average that it is in an uptrend. Just trading above its moving average is not enough. The moving average must turn upward itself.

We would much rather wait for confirmation and risk losing the beginning of the eventual rally in the financials than get in prematurely. As far as we're concerned, the financials are in just as bad shape as they've ever been, and we see nothing but further downside until the current trend is broken. Citigroup (C) reports tomorrow morning. It will give the sector direction, for better or worse.

Dow's resistance

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We've adopted a "long strength, short weakness" approach to the market to avoid having to outright 'time' it. Still, we enjoy the challenge of trying to guess the market's next move. We look at many blogs, particularly other technical analysis blogs, to see if others are seeing the same chart patterns we do. Some did see last Friday's selloff as a break of support, and called for a weak week this week:) While only some of them saw it as a breakdown, all of them recognized the resistance line drawn on the chart of the Dow above. A chart of the S&P500 is virtually identical, with resistance at 1390. Many are simply rounding it off to 1400. We've heard so much talk of this resistance level on CNBC, and have seen this line drawn so many times on various blogs, that we know it has significance. The market also has to contend with its 100dma (also shown on the chart above).

If Google's 75 point gap up tomorrow morning doesn't cause a market rally strong enough to break these resistance levels, then our guess is that they won't go down easily. It's only 130 Dow points away. The question isn't whether or not we'll reach it, but whether or not we'll close above it. We expect traders to start popping champagne corks when this line of resistance is conquered. It will be interesting to see how the market dances with this line on an intraday basis.

Of course, once this resistance line is broken, it becomes support.

Deere (DE)

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These two charts basically trade in lockstep. The one at the top is Agco (AG). The one below it is Deere (DE). They are both in long term uptrends as shown by the chart of AG.

The chart of AG is a logarithmic chart. It would look parabolic if it were an arithmetic chart with such a long time frame (24 months). It shot past the top of its channel last November, but didn't get all that far before returning to earth.

Now both stocks are roughly at the midpoints of their channels, and possibly in the process of breaking through resistance. We drew a sloping resistance line on Ag, and a horizontal one on DE. Either way you slice it, there may be a breakout in the making. They ran up, retraced 50%, and are running up again. We bought a beginning position in DE late in the day at 90. These stocks are slow moving relative to the other Ag names, and will likely have to be held for a longer time frame. This is fine, as we like to have several long positions open at any given time.

They offer a respite from the same 'ol commodity/fertilizer play that's been dominating the long side of our portfolio for some time. Although, truth be told, it's not exactly diversification. Both companies make farm equipment. We figure that if sales of fertilizer are up, they must be selling tractors, too. How's that for fundamental analysis? Actually, the reason they're in an uptrend is not that important to us. We're just hoping they continue their moves higher so we can use resistance as support and set up a mental stop loss at 90. That's the plan, anyway. Of course at 95 (top of channel), we would sell.

Long term POT

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The chart above is a logarithmic chart that shows POT going back about 18 months. You can see that it has reached the very top of its channel, meaning that it is roughly as far from its moving averages as its ever been since it broke out to new highs and began its steady uptrend in October 2006. Now that fertilizer stocks are the new "hot" sector, and everyone is trading them, there's no reason these stocks can't do the unthinkable... double by Tuesday. This is the point where we get nervous holding them, and rely heavily on our hedges for psychological comfort.

If these stocks go up further from here, as far as we're concerned, they'll be trading in bubble territory. Consolidation or correction is needed in this sector.

We are jealous of anyone who got into MTL yesterday. We were ready to pull the trigger at 138, but missed it by 50 cents or so. Now with the stock up 10 points today, we're just going to have to look for the next opportunity.

Blue Coat (BCSI)

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If one were to hold 5 uptrending stocks (stocks trading above an uptrending moving average making new highs), and simultaneously short 5 downtrending stocks (stocks trading below a downtrending moving average making new lows), one's portfolio would likely perform well every week, regardless of overall market direction. That's what we try to accomplish with our trading. While Ag has been the preferred long and financials have been the preferred short for some time, diversification is important. No one would normally consider CROX a hedge against Ag, but long AG and short CROX was a killer combo this week, to say the least.

Of course we don't know where Blue Coat Systems (BCSI - see chart above) is headed next, but it is definitely worth keeping on a list of names to short. If it can't rally on a day when the Dow is up 200 and the Nasdaq is up 55, it is clearly out of favor. While we wouldn't dump our entire portfolio into a short position on BCSI, it is certainly a good candidate for being one of those 5 shorts that could continue to underperform the market.

Like the long positions, one could scale in and out of the short positions given their location in their channels and positions with respect to their moving averages. We've used a 50dma for BCSI because the stock responds to it.

There are many stocks in downtrends at any given time. It can't hurt to diversify between the sectors when choosing the 5 that will make up the short side of your portfolio. For example, short C (financial), CROX (retailer), BCSI (technology), would protect you from individual sector risk while maintaing your portfolio's bias of "long strength, short weakness". As with long positions, short positions should be lightened ahead of earnings reports to avoid sudden reversals of trend. We often hold some of our position through earnings if we believe in the overall "story" behind the company, and with some consideration for how overbought or oversold the stock is going into the report.

Parabolic POT?

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In a deal announced this morning, Chinese company Sinofert agreed to double what it pays to Canpotex for fertilizer. Canpotex includes POT, MOS and AGU.

http://biz.yahoo.com/ap/080416/canpotex_china.html?.v=1

All three stocks are surging in premarket. Although the long positions we choose tend to have great underlying fundamentals, this blog is dedicated to technical analysis, particularly to trend channels. To that point, POT will explode through the top of its arithmetic channel this morning. We recently wrote a post titled "adjusting offsets", which explains the difference between arithmetic and logarithmic charts. The top of POT's logarithmic (log) chart channel is now somewhere between 195 and 200 (see log chart of POT above). POT will open above 190 today, nearing the top of its log chart channel. There are very few stocks worth owning this year, so the Ag names are benefitting from scarcity value. Everyone should have some of these stocks in their portfolio, although at these levels, these positions must be hedged. As much as we'd like to sell our 25% positions in CF and CMP, this would leave us with no long positions, which we cannot have. Ideally, these stocks will pull back and give us a chance to increase our positions with less risk.

While it isn't uncommon for the market's leaders to break through the tops of their arithmetic channels and begin trading within the confines of their logarithmic channels, it is very unusual for a chart to break through the top of its log chart channel. While it does happen, it's a one-in-a-million event. Even DRYS's recent parabolic run was all contained within its log chart channel. And that led to a bubble that ended in a 60%+ decline. We only know of one chart that has broken out of its log chart channel and continues to surge higher... WLT.

It is very important to note that it's the smaller companies that have the potential for these awesome gravity-defying feats. DRYS has a market cap of $3B, and WLT has a market cap of $3.5B, compared to the market cap of POT which is greater than $50B. It is more likely that CF or AGU explodes to the upside than POT, with market caps of $8B and $12B respectively. We switched from POT to CF recently because we are not afraid of POT getting too far away from us.

It's the law of large numbers. A company with a market cap of $50B is not likely to begin a parabolic run. If it does, it's a bubble waiting to burst. If you do enter these positions here, remember to beef up your SMN position. At some point in 2008 (anybody's guess as to when), there will be a commodity correction that will destroy many portfolios. When that happens, SMN will keep you in the game.

Crocs (CROX)

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You should all recognize this chart. It contains a lot of good lessons. We were trading it when it was trading above its uptrending moving average and within its well-defined uptrending channel. It was never a large position for us because we simply didn't understand the hype of rubber shoes that could be knocked off at 10% of the price of the original. Still, we couldn't fight the trend. We rode CROX up into the 70's and lightened up as it approached the top of its channel in late October. We sold out completely ahead of earnings because we simply did not want anything to do with a rubber shoe company. Once it was trading below its downtrending moving average, in a well-defined downtrending channel, we added it to our short list.

If you're thinking it looks like a buy here, we think you're crazy. It could very well return a nice 20 to 30% profit in a very short time. However, the rules of trend channel trading are that you only own stocks that are in an uptrend, and only short stocks that are in a downtrend. Shorting an uptrending stock as it nears the top of its channel is equally suicidal. Fighting the trend is a sure way to lose capital.

We think CROX is headed to single digits. Just as it isn't too late to buy an uptrending stock as it hits new highs, it's never too late to short a stock making new lows. Unless, of course, it slips below $5, at which point shorting is not allowed. Although we think CROX is headed lower, we wouldn't short a stock at the bottom of its channel. When it returns to its 50dma, it may once again be a good short.

If you post something like this on a CROX message board, devoted longs will hurl fundamental drivel at you faster than you can dodge it. They'll try their best to convince you that the stock can't go any lower because the p/e is already too low, or the rubber shoes have a new patented cushion sole, or, well you know the deal. Our problem with fundamentalists is that these are the same people who said that based on their "calculations", this stock couldn't go lower than $60, and $50, and $40, and $30 and so on. Fact is, any stock can go to $0. Including 84 year old $170 bulletproof Bear Stearns. The lesson of the CROX chart is simple. Make sure all of your positions agree with the direction of the trend... never fight the tape.

Mechel (MTL)

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We sold POT at 184 today and waited to buy it back lower. CF offered the better entry point, so we added a 25% position at 140.4 to replace POT. We're hoping the selloff intensifies so we can add more long Ag names, but we can't complain with today's action so far. It's the first day in the past nine that CF has pulled back at all. No doubt due to the increasing pressure on the indexes.

Above is a chart of MTL. We've been looking for an entry point into the steel names MTL and SID, both trading within well defined channels. We were not willing to buy either name above the center of the channel, as we don't think that the bull market in steel will last nearly as long as the bull market in Ag. We are going to get our feet wet with a small long position in MTL if we can get it at the center of its channel at 138 or so. How to hedge it? Simply add to SMN, the inverse of the Dow Jones U.S. materials index, which includes both MTL and SID.

We remain skeptical about steel in general because it is counterintuitive that sales of steel would remain robust enough to warrant sustained pricing in a lagging economy. Regardless of our vote on the future of steel prices, we aren't ones to fight the tape. MTL is the stronger of the two charts (recent highs compared to previous recent highs), so for now we will focus on buying MTL only. If steel is going to fail, the weaker names will warn us ahead of time as long as we stick with best of breed. Don't forget your hedge. The market's next move is more likely to 12000 than to 12600. All long positions should be sufficiently hedged in this environment, considering the path of least resistance is down.

Short Fin (SKF)

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Today treated us well. We have long positions in the Ultrashort ETF's SKF, DXD, SMN, and FXP. We also have long positions in Ag names POT and CMP. CMP is not a "trend channel" type of stock, but it's a lesser known Ag/materials play which is showing incredible strength, so we have a small position in it. Of course we don't like seeing CF charge ahead without us on board. We continue to hold POT despite it hitting the top of its channel, because we have an imbalance (more Ultrashort than long), and because we can't get hurt holding it considering we're also holding SMN. The SMN insurance policy cost us 4 cents today. A small price to pay considering how well the Ag names performed today. We'll take insurance at that rate anytime.

Although we were early to leave CF, and think it could go as high as 160 before retreating, our conservative approach (in bear markets) tells us that we'll have a chance to get back into the name cheaper at some point in the near future. In the meantime, we're cleaning up on SKF, following continued weakness in the financial names (see chart of SKF above). This position is specifically targeted at the weakest point of the market, in line with our overall approach of "long strength, short weakness". On days like today, this approach (long Ag, short fins), pays off in spades.

LDK remained above support. Every day it does this, its support level strengthens.

Back to CF :)... we're thinking that this may be one of the best performing stocks of 2008, even from these levels. As much as we do follow our trend channel rules, we also have a gut. Our gut tells us that this stock is not going to play by the rules this year. When it begins to retreat, we're going to buy back into the name with a 25% position at 140. Although we feel the stock is overextended following a nearly 50% gain over the past couple weeks, it has scarcity value. It's in the strongest sector, and it's a medium-sized company. Large enough to be relatively stable, yet small enough to really move. Its relative strength is quickly making it surpass POT as our "favorite" stock. We are going to begin to get more aggressive with CF, buying as if its trend channel were higher (using its 75% mark as its centerline). This means we'll be trading it based on its log chart, rather than its more conservative arithmetic chart (see earlier post "Adjusting Offsets"). This is as liberal as we're willing to get. If it breaks through the top of its log chart channel, it is free to go up without us. We will not chase it into an impending crash. We're aware that getting caught up in a bubble can devistate a portfolio. For this reason, we are only going to become more aggressive with CF as long as we ramp up our position in SMN the appropriate amount to offset the position. We feel that anyone buying Ag stocks "up here" without hedging with SMN will have some VERY bad days around the corner. Still, we cannot avoid being part of the Ag bandwagon, as the strength in these stocks suggest that they will continue to outperform the market for the forseeable future. It is always the stocks that are hardest to buy (they don't pull back) that are the ones you really should own.

Although we believe that the market will remain under pressure for at least the remainder of the week, we're going to begin scaling out of SKF and FXP soon. We have a great profit in SKF, and are close to breaking even on FXP after being underwater for some time. We'll hold DXD because it simply doesn't move... there's little risk holding DXD considering the small percentages involved. Needless to say, we will not be selling any SMN considering the Ag stocks have completed at least 75% of their current rallies, if not more. It will be interesting to see which position will be more profitable over the next month, CF or SMN. While we would not want to bet on it either way, we don't mind being long both names because regardless of the outcome, we feel this paired trade will be profitable.

LDK Solar (LDK)

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We have a long history with LDK. We've been in and out of the stock based on its trend channels for the better part of a year. Now that LDK has broken out of its trend channel, its next moves are far less predictable than they have been while its channel was intact. While it does not fit our profile of a stock trading in a defined uptrending channel, we have been asked to comment on it.

What we see is a stock that is now trading above an uptrending moving average, clearly in an uptrend. The uptrend is represented by the diagonal support line below its recent lows. This trendline is not that significant, though, considering it's only been forming for 6 weeks. Still, it's all we have to go on for now. LDK gapped up from 30 to 31.5 in early April. It has formed a support level in the 31 area, although again, this is a very short term line, making it only significant to very short term traders. This is represented by the upper of the two horizontal green lines on the chart.

The lower of the two lines at 30 was former resistance which has now become a significant support level. Technical traders often look to see if gaps will be filled or not. It will be very bullish for LDK if it can avoid closing the gap between the two horizontal lines on the chart. If it fills the gap and closes below 30, it will likely continue down to the next support which is the 30dma, currently at 27.

LDK is not a stock trading on technicals right now. Instead, it is simply following the solar rally. The strength of that rally, and of the broader market is the real question here. You already know what we think about the broader market. Although we do not attempt to outright "time" the market, we cannot help but point out that the major indices broke support lines and moving averages on Friday. Actually, next week is pivotal, as it will likely set the tone for the market from now until next quarter's earnings season. If the earnings reports are acceptable, the market will remain bouyant for the next three months. If they are worse than expected, we will revisit Dow 11700, which will be viciously defended once again by the Fed and the PPT. The next three months, in that case, will be all about trying to keep the market afloat against all odds.

As for the solar rally, it remains intact. The recent pullback in shares of STP, ESLR, CSUN, SOLF, ASTI and DSTI are still within the limits of normal, healthy consolidative action. It is only once the solar stocks retrace more than half of their recent gains that we can say that another downleg has begun, and that call cannot be made yet.

If LDK does treat investors well in 2008 and 2009, it will have a lot more to do with its higher margins, completion of its poly plant, and higher eps numbers than its technicals. It will likely achieve most of its gains by gaps following its earnings reports. It's anyone's guess which earnings report will start the fireworks.

Dow and S&P

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Thanks to GE's earnings miss, the Dow is once again testing its support line. Bulls are sitting on the edge of their seats, knowing that if this line gets decisively broken, their fun is over.

It will not go down easy. For many, this is a buy signal. In fact, we may be buyers today, too, if CF gets close enough to its 3/4 mark to interest us. We sold it at 137+ yesterday, so even at 134 it would be tempting to step back in with a 25% position. We are still holding POT.

It will likely take more negative news to get the Dow to break down. We've already had AA, AMD and GE report problems due to the economy. Sentiment is still positive overall, but is weakening. If there are a few more negative reports, sentiment will change (back to reality, actually), the Dow will break support and the bear market sell0ff will resume.

We always reference the Dow, although the same lines can be drawn on a chart of the S&P. The Nasdaq is similar, but often goes off on its own tangent, making it a less reliable market indicator. It is still important to watch all of the indexes because one may break a line before the others, giving early warning of what the others are likely to do. We see today that the S&P is very close to breaking its 50dma. The Dow has some breathing room. Small discrepencies like this are important to note. If the S&P breaks (and closes below) its 50dma, it is a very bad signal despite the Dow still closing above its. We'll be keeping our eye on the S&P closely, as it is currently resting on its support line and its 50dma. Very fragile technical position.

Adjusting Offsets

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The lines that define the top and bottom of the channel can be set at any distance from the computer-generated linear regression line in the center, depending on an individual investor's tolerance for risk. We choose to set them conservatively, meaning there are often areas on the chart where the stock will trade above and below our offset lines. It is important to note that the line that really matters is the one in the center. The center line never changes. Once established, it tells you quickly whether or not the stock is overbought or oversold, and roughly how much so. Look at this new chart of CF with larger offsets than the one previously posted. It suggests that CF could reach 142/143.

To complicate matters even further, we should mention that there is a great difference between an arithmetic chart (which we use), and a logarithmic (log) chart. The arithmetic chart is scaled such that each dollar equals the same unit of height. The logarithmic chart is scaled such that each percent has the same unit of height. While the difference is hardly noticable on a short term chart, it becomes substantial the further the chart extends into the past. We use the arithmetic chart because, once again, it is the more conservative one. A log chart of CF suggests that the top of the channel is at 153, and a log chart of POT suggests that the top is at 195.

We are aware that these discrepencies exist, and appreciate that charting is not an exact science. If the market were very bullish, we would adjust the lines to allow for more upside. Given that we believe we're in a bear market, our conservative stance should be understandable. If we do get to a point where we are more short than long, we will likely hold small amounts of the long positions above the top of the channel to offset the imbalance.

The point of trend channel trading is not to nail the very top and bottom, but rather to have your positions properly scaled for the amount of risk vs reward at any given point in a chart's natural cycle. CF's rally could end here at 138, or continue to 143 or even to 153. That part is unclear. What is clear from the trend channel is that regardless of whether CF has 5 points or 15 points of upside, there are 24 points of downside.

Another way of calculating potential short term upside is by figuring out at what percentage above its moving average a stock typically tops out. We've done this for CF and found that at 30%-33% above its 50dma, it's rallies end. This method puts CF's top at 151-154, similar to the log chart, as both work off of percentages.

So each individual must make adjustments to suit their own level of risk tolerance. If you choose to hold CF in hopes of capturing another 10 points, we wish you well. If our risk tolerance allowed for that, we would certainly be selling at 150, as we know that with the exception of raging bull markets, stocks are attracted to their moving averages like moths to a flame. And in the case of CF, its 50dma is currently at 116. Food for thought.

CF Industries (CF)

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We just unloaded the 25% position we had in CF at 137+. This position was added yesterday at 131.70. It will probably go higher from here just based on its momentum, as it has done in the past, but rules are rules. The top of the channel is at approx 138. Of course when it drops to the 3/4 mark again (currently at approx 133), we will be reloading with a 25% stake.

Now we are looking at POT. If we can get 181, we'll unload that one, too. We sold a small amount of SKF at the open (110+) and replaced it with a small position in SMN at 33.8

US Materials (SMN)

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This Ultrashort ETF contains MOS, MON, POT, AGU, CF, TRA and TNH. Great news for anyone looking to short the Ag names as they reach the top of their channels. Unfortunately, this ETF tracks the inverse of the Dow Jones U.S. Basic Materials Index, so it also includes coal and steel, as well as precious metals. These are the hottest sectors right now.

Despite that, this ETF would be a great hedge against any long Ag positions. Here's the thinking: back in October, SMN was trading at around $44. Today it is 23% lower, at $34. In the meantime, MOS went up 100%, and POT went up about 50%. So why bother holding both, considering all SMN could do is eat away at your gains? The answer is found in mid January's action. From the 1st of January to the 22nd, MOS dropped about 28% and POT dropped about 26%. In that same time frame, SMN went up 50%. That's how these hedges work. They are like insurance policies. You can buy small amounts of them and forget you have them as long as you're holding your long position/s. If ever there is a raid on commodities, you'll find that your little SMN insurance policy is capable of doing more good than it ever did harm. We will be starting a small position in SMN tomorrow to allow us greater confidence in holding the Ag names this close to the top of their channels.

Potash (POT)

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We love POT. Not because a billion Chinese people suddenly need to eat like Americans, and not because 1/3 of a billion Americans just figured out that they can now increase the gas mileage of their Lincoln Navigators to 14 mpg by powering them with vegetable oil. While the stories are necessary to create the ten-baggers, we love POT simply for its predictability.

Our approach to the market requires us to specifically target stocks trading in distinct trend channels, as the above image illustrates. There are 5 trend lines on the chart, and two moving averages (50dma and 100dma). In the ideal world, a stock is stable and predictable enough that its moving averages parallel its trend channel. This helps give you a very clear sell signal when both the trend channel and the moving average are broken simultaneously, as technical traders worldwide would all be aware of such an event.

The center line is a computer generated linear regression line. Somehow the computer calculates the mathematical center of each trading day and draws a single line that best represents the balance of that information. This gives the chartist the best odds of correctly calculating the slope of the current trend. The other lines are parallel offsets of the center line.

We always maintain a 100% position at the bottom of the channel (green line), a 75% position at the 1/4 mark, a 50% position at the halfway mark (yellow line), a 25% position at the 3/4 mark, and a 0% position at the top of the channel (heavy red line).

To maintain the proper exposure at each point in the channel, we often find ourselves trading several times a week, or in volatile times, several times a day. This is ok, as using this system forces all intraday trades to be profitable, one way or another.

We always sell the entire position when a stock reaches the top of the trend channel, even if it breaks out and goes higher. At that point, you're almost always given a chance to buy the stock cheaper in the near future. If it just keeps on going, we turn the other way and look for the next stock trading within a well-defined channel. Our thinking is that a lost opportunity is a lot easier to overcome than lost capital.

What we're doing when we trade this way is simply putting the odds in our favor at each point in the channel. We're not even betting on market direction, because we generally are long a strong, uptrending chart and simultaneously short a weak, downtrending chart. As long as the weak chart underperforms the strong chart, we profit despite market direction.

Disclosure: Author is long POT and CF

Charting the Dow

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From a technical standpoint:

A chart of the Dow shows two lines converging, meaning an important breakout (or breakdown) is imminent. The Dow is hitting resistance in the area of February's highs and its 100 day moving average. This resistance zone (12690-12750) was tested just days ago when the Dow was rejected at 12733. The support line is less influencial, as it only goes back to March 10th. A decisive break of it would nonetheless give the market reason to believe that the recent positive sentiment is ending, and trigger a tradable sell off. Until the Dow breaks its 200 day moving average, which is currently at 13,125, we are in a bear market. Any rallies or selloffs below 13,125 are typical bear market action. It is dangerous to get caught up in the hype of a rally below this important milestone, as the next leg down could leave you holding the bag.

From a fundamental standpoint:
The market has been directionless over the past several sessions. It is simply in a holding pattern, waiting for direction from the earnings reports of the financial companies. Next week it will get its wish, as BK, C, GS, JPM, MS, USB, WB, WFC, and MER are all set to report. In addition, we will get retail sales figures, PPI, CPI, housing starts and initial claims. The market will be given a direction next week for sure, if not sooner.

How we're trading it:
We remain long the Ag names POT and CF, which are now 3/4 of the way up their trend channels. Because we hold a 100% position at the bottom of a channel, a 75% position at the 1/4 mark, a 50% position at the halfway mark, a 25% position at the 3/4 mark, and no position at the very top of the channel, our current positions in POT and CF are only 25% positions. Due to recent volatility in these names, we have resorted to daytrading more than usual. We sold POT today at 179, as it neared the very top of the channel. We reloaded by buying CF at the 3/4 mark at 131.70. If the market rallies tomorrow, we will be selling these names at the top of the channel once again. If the market drops, we will be adding at the halfway point of the channels.

In addition to the Ag names, we have a long position in SKF. SKF is an Ultrashort ETF which mirrors the performance of the financial stocks. A small amount of SKF here will work well to hedge the long positions, given that the slew of earnings reports from the financial companies next week have the potential to take the market back down to the 11700 level very quickly.
The SKF position should be smaller than the long positions in the Ag names, as it is specifically targeted at the very part of the market that is most fragile at the moment. If the market rallies, you want your profit on the Ag names to outweigh your loss on SKF. Alternately, if the market sells off, you are just looking for SKF to allow you to break even on your longs. SKF is not for a profit, but for a hedge. If another financial company goes under, a little SKF is going to go a very long way.
We will be adding a position in either DXD (Ultrashort Dow) or DDM (Ultralong Dow) on a decisive break of support or resistance whenever that time comes. If we had to guess at the market's next move, we would guess that it will break support and sell off. Still, we are not willing to place a bet based on a guess, so we will wait for one of the lines to be broken, and trade accordingly.