Potash (POT)

Click Chart to Enlarge

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