DryShips: Poised to Rally 26 comments
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In the past, I have discussed how I like to use simple technical patterns to determine trading targets. Among my favorite indicators are trend lines, triangles and fans. This week I examine another powerful tool- gaps.
A gap occurs when a stock price opens at a level that is much different from the prior day's close. For example, if shares closed the prior day at $15 and opened today at $20, we would view this as a $5 gap higher. Once a gap occurs, the prior day's close ($15 in this example) becomes a key level of technical support. When prices gap higher, the gap becomes support; when prices gap lower, the gap becomes resistance. Until this new support or resistance level is violated, the underlying trend remains intact and allows us to trade accordingly.
Examining a chart of DryShips (DRYS), multiple technical patterns emerge. As the worldwide recession spread and deepened, shipping rates collapsed - DRYS's price quickly followed. From a high point of $110.74 in mid-May, the stock traded to a low of $3.54 in late November. This stunning 97% drop over six months created a clear downtrend that was rarely tested. During this long descent, we saw three gaps lower - from $55 to $50 (9%) in mid-September, from $31.50 to $28 (11%) in early October and from $18 to $15 (17%) in late October. Each time the stock gapped lower, the gap served as resistance to future rallies.
Since bottoming on November 21, we have seen three gaps higher-from $9.50 to $11 (16%) on December 10, from $12.50 to $13.50 (8%) on December 18 and from $10.50 to $11.65 (11%) on January 2. These levels now serve as support that should allow the stock to trade higher. Importantly, the last gap higher has broken the long standing downtrend and has allowed DRYS to close at its highest level since bottoming in November. Combining all the technical signals, we see a reversal in the share price that will allow for a sustained move higher.
As detailed in my weekly newsletter EPIC Insights, I recommend DRYS as this week's technical trade. Having experienced a dramatic price decline, DRYS is poised to bounce toward $18 where it will meet its first level of resistance. I do not expect these shares to ever regain prior all-time highs and many factors make me hesitant to own this position for a long period of time. However, the technical backdrop and prudent use of stop loss orders make DRYS ideal to rent with the expectation of a quick gain. Keep your position size modest and use a close below $10.50 as a stop loss. As we approach resistance at $18, look to harvest gains.
I believe quick, opportunistic traders will do well in 2009 and selling into resistance levels is an excellent way to prevent surrendering hard-fought gains.
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However it is worth mentioning other shipping stocks and diversify a little bit: EXM, EGLE, GNK, OCNF, NM. Maybe I missed a few.
In terms of valuation, EXM is comparable or even better than DRYS, consider its fleet size. A good thing is EXM does not have the trouble of one major share holder conducting controversal deals, like George Economou does with DRYS. I do not believe George Economou had any wrong doing, but the perception to the general investor community will inevitably be negative so that is a take back.
I have since diversified a big chunk of my DRYS holdings to EXM and EGLE because of concern about investor perception of the dealings of George Economou.
I don't understand! Based on your description where you entered DRYS you should not have an average DRYS price as high as $25. Actually you should be makign money by now. You first bought at $70, and then at $14, and then at $5. Suppose you spend $10K at each price level, you would have bought 143 + 714 + 2000 = 2857 shares for a total cost of $30K, or average cost of $10.50, and you should have a comfortable 32% profit at today's close price of $13.85.
Your investment strategy must have a problem. You should view the lower price as a big buying opportuity, not as opportunity to lose money. When DRYS was at $3.05, you had an opportunity to buy way much more shares that you could have bought when it was at $116 a share.
Another good shipping stock you might want to watch is TBSI. It broke through its overhead resistance today. Then it came back to it. It has a higher PE, etc. However, it is much less leveraged than DRYS, so it could perform better in the current down market. If it continues up from this resistance point, the chart looks as if there is clear sailing for TBSI until it gets to the $23-$24 range. TBSI closed at $11.37 today, but it was up after hours to $11.94.
Another point is that DRYS has been an emotion driven stock for some time now. There is no reason to think this is going to change soon. As long as the market emotion is up (and the Baltic Dry Index will likely follow that), DRYS is likely to go up. He's ridden the horse this long, he may as well ride it a little longer. Another point is that China is reportedly close to an agreement on 2009 iron ore prices. When this agreement is in place, shipping should surge. It hasn't occurred yet to my knowledge.
I rest my case.
Nonetheless, I'm long ESEA.
An opportunity of a lifetime... LOL
Wake me up when the Baltic Dry Index gets near a break-even point of 3,000 or so, then maybe we'll talk. Maybe...
WRONG!
The market has gone up on news the so-called 'stimulus' is delayed. Why? Because the market knows it wont be good for it, and wont mind at all if it is delayed. In fact if there was news tomorrow that Congress would quit for the year, the markets would rally big. Google "Congressional Effect management" and eric Singer on this factoid!
the markets are also up due to 'january effect' money flows reversing after 3 months of forced selling.
December was a good time to buy beaten-to-a-pulp fallen angels. they will rise.
No wonder the media is laying off you guys. cutting edge, really!
On Jan 07 06:39 AM Jonas wrote:
> Baltic dry index is at an all time low, when it reaches 3000/4000
> DRY will go to 40$/60$ and 90$ in 2010. I will sell at 60$ and buy
> financials long. I would not even be surprised to see a pop of +50%
> during the next few days.
On Jan 06 02:41 AM Mark Anthony wrote:
> PharmBoy:
>
> I don't understand! Based on your description where you entered DRYS
> you should not have an average DRYS price as high as $25. Actually
> you should be makign money by now. You first bought at $70, and then
> at $14, and then at $5. Suppose you spend $10K at each price level,
> you would have bought 143 + 714 + 2000 = 2857 shares for a total
> cost of $30K, or average cost of $10.50, and you should have a comfortable
> 32% profit at today's close price of $13.85.
>
> Your investment strategy must have a problem. You should view the
> lower price as a big buying opportuity, not as opportunity to lose
> money. When DRYS was at $3.05, you had an opportunity to buy way
> much more shares that you could have bought when it was at $116 a
> share.
>