Click charts to enlarge The chart at the top is CF, the chart in the middle is POT, and the chart at the bottom is MOS. What we're looking for, at some point, is a break of the short term resistance line that these stocks have formed since they topped out in mid June. This same basic pattern has played out several times with these stocks in the recent past. A break of the line in each case has been followed by a strong rally, several weeks in duration.
Whether or not it will play out this way again is anyone's guess. We can only tell you what to look out for, not what will happen. There is a theory that traders should buy into strength. Following this theory, one would buy aggressively on a break of the resistance lines drawn above. While we understand the logic of buying the breakout, we prefer to buy uptrending stocks on weakness instead. This gives us some breathing room should the breakout fail.
49 comments:
Snot, any thoughts on PBR. This look like your kind of chart. I bought at 57.6 in what appears to be at the bottom of its channel. I'm expecting to get a nice bump once xom, bp, and cvx reports.
Thanks in advance.
It's hard to draw a channel on the chart of PBR. Perhaps the spike in May is throwing it off. When we freehand the channel, it is at the very bottom of it right now.
We vote "yes" for PBR because Ken Heebner has an awesome track record, and it's his top pick. He was pumping it at higher prices than this, so considering how far it has corrected, it looks good here. You can always add to the position if it breaks down, then break even on the first bounce. The odds are in your favor with this pick.
Wow, just noticed PBR is sitting right on its 200dma. That's a major support level. It bounced off of it strongly in Aug 07.
It's a little worrisome that it is just hanging out 'down here', rather than bouncing, but the institutional sponsorship behind PBR rids us of much of that concern.
MON seems to want to pull itself back into its channel. It's a good sign because it is one of our canaries... not quite dead yet.
SNOT i know this is off topic but what doo you think of shorting the airlines they had a 30% run up last week and then a 35-60% run today. They are all broken above their trend channels which are downtrending. Even if this is a turn around i expect atleast a 15-20% correction within a week they just gone up to high to fast. I would love your opinion on this.
Obviously this falls into a fun speculative short term trade.
Snot, most of the dips in charts of CF, POT, and MOS coincide with their earnings. Of course, this is expected with the run-ups preceding the earnings. This time, however, there is no such run-up. Previously, with such run-ups before earnings, it was easy to sell before earnings. Now, I'm not so sure. Will the earnings be the catalyst to break the short term resistance?
Mike, We haven't been following the airlines at all, but agree with you that they've gone too far too fast. Flights are empty nowadays, so it's hard to imagine that Wall Street is really convinced there will be a fundamental turnaround over the next 6 months. If you want to be safer about it, only go short when the Dow stops rallying, because a rising tide raises all ships.
Same rules apply that you start with a partial position so you have some room to manuever if the trade goes against you. AMR has more than doubled in the past 5 days... amazing.
Leochen,
Our overall thesis in the market is that technicals decide all moves. Fundamentals are just excuses for those moves. If a stock is overbought, it will sell off on news regardless of what the news is. If it is oversold, it will rally on news no matter what the news is. The fertilizer stocks are currently oversold, so we're expecting a rally in the very near future. A rally this Thursday on POT's earnings? Maybe, maybe not. That's too easy. Perhaps a gut-wrenching selloff on POT's earnings, then a phenomenal rally next week after MOS and CF report on Monday. That's the Wall Street we know.
Hedgies have to profit on this one way or another, remember.
If it does play out this way, we will be able to substantially lower our break-even prices on all of the fertilizer names.
General market commentary:
During the day, financial news reporters collect two stacks of articles, one with positive news, and one with negative news. At the end of the day, if the market is up, they claim it was the positive catalysts that caused the rally. If the market is down for the day, they report that the negative catalysts caused the selloff. Except for some obvious news-driven market moves, the above holds true on most trading days. The news does not drive the market. The market drives the news.
In this blog we have a very diferent point of view about Ag.Please Snot it will be very interesting your opinion.
http://www.chartswingtrader.com/
I just wish these prices would hold till tomorrow... so i can get the rest of my money in. It's all or nothing at this point. If ag is the strongest sector in the economy, and it breaks down, then its pretty much game over for the stock market and the country.
All I know is that things were looking pretty bleak there at the end of march. But if you bought CF at its low during all that bleakness, you'd have made 60% in a few weeks.
Look AT UNG
just backed up the truck.
anyone else?
Cheers
(on the ferts, I mean)
Cheers
Forgot to sign off on the UNG post.
That was me clarke. Any critique is welcome
We may be wrong, but POT's earnings are released tomorrow morning, not afternoon.
At the end of March, things did look very bleak. It was very hard to buy at the bottom in March. It looked like everything was breaking down. We aren't buying more yet because we're already 64% invested. If we drop hard intraday from here (perhaps tomorrow morning), we'll back up the truck then.
I still believe in AG, if it means anything... :D
Hey Anon - been watching POT and MOS move down, up and down the last few days - MOS again bouncing off the 100DMA as I write, we will see if it holds the rest of the day and tomorrow...
All in on AG? Seems a little dangerous but you could be well rewarded.
Funny thing is, if we rally strongly from these levels, in hindsight we'll wonder why we were nervous to buy here. None of these charts has broken down. It will just look like another one of those "why didn't I go all-in at the bottom of the channel" spots on the chart.
What about this potential strike at POT...that might not be good.
It would be good for MOS and AGU. :P
That would probably drag POT up with it.
I am bit worried about the potetial strike at POT. Which i believe will hold POT back a bit i still expect it to go up after earnings but not as much as if there was no risk of a strike. So i decided put money into AGU since it looks to be the new best of breed. Also since AGU has smaller market cap it has chance to run higher then POT.
I'm glad to see my SIRI @ 2.10 call turned out ok.
NFLX generated a buy today. I wish I had the money....
WOW - total slaughter in AG today, broke alot of support - if POT goes sub 197 - watch out!
oh...the pain Mr. Snot....I hope this stratagy works better then my last buy at the bottom of the channel...that was RIO. What a tradgedy that turned out to be ;o)
Snot, if we break down tomorrow on POT's earnings, do you still see a significant rally being possible when the others report next week? Significant meaning back to mid-channel or so.
I've bought into this weakness pretty hard, and don't have much left for damage control should I need it. Kind of a gamble, I know. What's your gut feeling for tomorrow's action?
Thanks, and keep it up!
Whether we drop hard tomorrow or not is irrelevant. What's important is do we recover quickly? There's nothing wrong with an intraday spike below the channel. But if this trade goes wrong, and these stocks close down 15 points each tomorrow, we'll have to enter damage control mode. We have 36% of our assets currently allocated for damage control. All that means is that if prices get ridiculously low, we'll buy more and sell into any bounce, thereby lowering our break-even price on our original shares. We'll do this again and again until we can sell all shares at break even, because once we enter damage control mode, we immediately admit that we were wrong about the trade, and getting out with little damage quickly becomes the #1 priority. We hope this isn't your first channel trade because it may dissuade you from channel trading if this goes wrong. Channel trading is only profitable (like any system), over the course of several applications. You make 15% three times, then you lose 15% once... again and again over the long term.
Whoaaa! After the great earnings report POT had this morning, it appears, at least in the Pre-Pre-Market that POT will rock and roll today, and that the ag stocks will move along with it. It could be that those of us who invested near the bottom of this channel are in for a very nice run.
Agr8gem57
POT & AGU downgraded this morning after earnings? Are the hedgies trying to scare up some cheaper shares so THEY can back up the truck later on today?
The Ag play is now dead, the funeral will take place over the next few days and weeks. Best you can expect is to get out ASAP on the bump up on earnings that should by all reasonable accounts have POT north of 230. The fact that it isn't should have you piling into SMN.
Whatever we do today, let's not judge POT's reaction to earnings until the close. Delayed reactions are common, and momentum also plays a role. We'll only know how traders feel about their report at 4:00 today.
SMN has formed a small ascending triangle and the next logical move is a strong breakout to the upside. The fertilizer stocks have been creating descending triangles in the meantime, and the next logical move for them is a move to the downside. Typically you want to buy a strong company when the broader market takes it to the bottom of the channel, through no fault of the individual sector or company itself. We don't have that here, which is a little scary. Still, we remain in a trade and stick by our rules until proven wrong. There are multiple reasons to take either side of the trade here, and we could form a strong arguement for a move to either side. Admittedly, this is exactly how stocks perform just before breaking their channels to the downside. But there is no reason to panic unless that actually happens, at which point everyone will be in panic at the same time, making SMN reach 40 in no time. We should have a lot more information by the close today, and earnings for MOS and CF on Monday may seal the near-term fate of the entire sector, for better or worse.
what about this?
Steelworkers vote to strike if necessary against Potash Corporation of Saskatchewan
http://www.newswire.ca/en/releases/archive/July2008/22/c6446.html
and this:
Union votes in favor of strike against Potash Corp
http://www.reuters.com/article/marketsNews/idUSN2243720020080722?pageNumber=1&virtualBrandChannel=10222
maybe this holds back POT.
Haven't sold any yet, but have added a lot of SMN. Of course this decisive break of trend channel and moving average is the worst case scenario for these stocks, but we haven't closed yet. This may be the best buying op of the year in hindsight. If they close here, we'll enter damage control mode for a trade gone bad.
Snot..I cannot do any damage control..do you see it moving in the next few months? I dont mind holding but I am concerned that it will fall continue to fall and never get to the 140's again.
Even if assuming this is the end of the ag run, and it does seem more and more likely that is the case, then it is still unwise to sell now. The sector is too big for it to pop like a balloon. There would be a rally that fails to make new highs. That rally has not come yet. The rally from 2 weeks ago is not it. That was too soon. The august rally is what will determine if ag is dead or not.
Thank you...I really dont have a choice but to hold right now. But will it rally close to the highs?
Wow, look at MTL today! It's unlikely that the fertilizers will crash as hard as MTL if they do, because they are widely owned by institutions that don't trade in and out on a daily basis, like pension funds, etc.
Nonetheless, this is looking pretty bad. There are warning signs everywhere... canaries dropping like flies. MTL is just one example of the carnage.
We're going to continue to be patient at least until the close today. There are silver linings for Ag, such as how well MON is holding up today.
MON is one stock that is indicating that the selling pressure may be coming to an end. TRA and TNH are also resisting today's selloff. It seems limited to the high profile names, suggesting that this selling is not by smart money, but by hedgies looking to break up the monotony of the day. Their games are usually short lived because when they drive prices down on stocks that smart money wants to own, they get bought up quickly. We would not be suprised if guys like Ken Heebner are stepping into POT here, as it is one of his favorites.
amen...
Snot,
I totally agree with you. People buying shares over here will look like super stars in the next few months (if the rally continues). Also a point to note is that CF came close to that 137 moving average but rebounded much before it got there. Thanks for providing that number. It certainly is a psychological boost.
- G
Any guesses why AGU is down 6% when the others are up 1%? (Other than the fact that I own mostly AGU?)
Ya, the hedgies are dumping all over AGU...brutal. This thing may get into the high 70s pretty quickly here.
This isn't Ag related, this is a good old fashioned general across the board profit taking. It will probably continue through tomorrow, although on lighter volume, and then next Monday or Tuesday we may have one last chance to back up our trucks when the S&P 500 retests the 1200 level one last time before kissing it goodbye and giving us a ripper of a bear market bounce.
Mechel is getting it's bloody head ripped off today. Thank you Snot for posting your cautious note on that one a week ago or so. I was thinking about it but read your post and decided against it. Whew!
What a tough call. Now that these stocks have closed down so much, we're wondering if we should enter 'damage control' mode or not. What's making us cautious is the drop in MTL. We sold MTL in the mid 40's, and now just a few weeks later, it's 23. That's just brutal. Our rules say to sell when a stock breaks its trendchannel and moving average decisively, and closes below it.
MOS has done this.
CF has not.
POT has not.
AGU has not.
It's a really tough call. We've also got MOS and CF's earnings out on Monday. And, how much of today's selloff was due to the Dow being down 283 points?
Did these stocks really do that poorly today considering? CF down 9 cents, MOS down 3.5... not exactly a fertilizer sector massacre.
OIL has reached the 100dma, and is very unlikely to drop hard from here, so the selling in commodities may be hitting a wall.
Additionally, we're loaded up with SMN, which we added heavily this morning.
This is not what you ideally want to see at the bottom of a channel. It certainly is a whole lot easier when your stocks rally strongly after an intraday selloff, an then just go straight up.
But here we are, with a tough decision to make. Here's what we're going to do...
We're holding all of our SMN. Even if fertilizer rallies, the other materials are not likely to rally strongly, so SMN will help a lot if fertilizer drops, but not kill us if fertilizer rallies. So there is little harm in holding SMN, and it may save our neck.
As for POT, CF, MOS and CF, we're going to try our best to hold all of them until MOS and CF report on Monday. If we get a strong rally tomorrow, we may sell 10% of them, just to be on the defensive and to start 'damage control' mode while maintaining at least a 50% exposure to fertilizer.
If POT, CF and AGU follow MOS and close below support, then we have no choice then to admit fault and enter full 'damage control' mode, relying heavily on SMN to take up the slack.
Judging by today's POT report, it seems that analysts are getting closer to being able to estimate how these companies will do. In the past, their estimates weren't even close. If this holds true for MOS and CF, this whole sector may just top out, regardless of valuation. Companies need to suprise (i.e., beat whispers) in order to continue their uptrends.
If we do wind up looking for the exits on this trade, it does not mean that those with stronger stomachs cannot still ride these stocks to new highs over the next few months. We just have a system in which we do not allow ourselves to take on unneccessary levels of risk. Our concept is that a missed opportunity is easier to overcome than lost capital. We never look back after selling and say "shoulda, woulda, coulda". By then, we will have moved on to the next group of stocks making new highs. Let's hope that the fertilizer trade is still intact. We should know definitively by Tuesday.
Indeed if these stocks are lost, the market will be losing one of its very few pockets of strength, at which point there will be no reason for the Dow to keep its head above 11000.
You have missed the point on MTL by missing out on news. Steel is down 5% or 6%. See SLX. MTL is down a half a mile because of the government's involvement and shady stuff, etc. Can't use MTL as an indicator because of unusual factors.
It's true about MTL, but it nonetheless provides a psychological end to steel stocks. They were over anyway, this just makes them look really bad. If we were considering buying steel, this would be one more reason to hold off.
MTL's story:
http://www.reuters.com/article/marketsNews/idINL493964520080724?rpc=44
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