DryShips: Poised to Rally

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.

Comments

[drmbowen:]

I first bought DRYS @ 15ish several years ago, and started selling @ 125. Yes, I lost plenty when it imploded, but, with the CEO's apparent intent not to privatize, have no doubt DRYS will regain its footing the commodity sector revives. Previously, DRYS stayed predictably ahead of GNK. That should reverse now, with DSX (an account of having the best balance sheet) perhaps ceasing to be the laggard and adopting a middling position. However, while DRYS may indeed meet resistance @ 18, it will surely sail on into the 30s and 40s without much trouble (and I agree it will never see >100 again).

Jan 05 01:36 PM

[notsosmart:]

can you trust management?

Jan 05 03:40 PM

[Sean Hannon:]

This is one of the main reasons I would never hold these shares long term. I do not like their governance and think there is too much self-dealing. That is why I stressed in the article this is purely a rented short term position for quick profit - not a long term portfolio holding.


On Jan 05 03:40 PM notsosmart wrote:

> can you trust management?

Jan 05 03:56 PM

[auto44:]

Good call
They use stockholders as patsies...............

On Jan 05 03:56 PM Sean Hannon wrote:

> This is one of the main reasons I would never hold these shares long
> term. I do not like their governance and think there is too much
> self-dealing. That is why I stressed in the article this is purely
> a rented short term position for quick profit - not a long term portfolio
> holding.

Jan 05 05:30 PM

[PharmBoy:]

I bought DRYS when it retraced to the mid 70's and thought I was getting a good deal at the time! I then doubled my holdings by purchasing more at $14 and finally $5. My average price is now around $25/share (excluding Aug and Oct dividend payments of 20 cents/share).

At today's price, I don't want to lock in a loss by selling ATM calls for $2 and OTM calls for mere pennies and then have the shares called away later this month. Additionally, there doesn't appear to be any substantial overhead resistance until around the $25 mark (Sean, you called it at $18...?), which appears to be marked by a double top on Oct 13th and 20th, and a weaker 3rd peak on Nov 4th which begat the slide to 3-ish.

On the other hand, they say you should sell into strength, and this rally has had legs for over a month now (though this leg's volume is markedly lower than the first leg's, not to mention a severely overbought scenario on the RSI). My dilemma boils down to this (with a nod to Kenny Rogers): should I hold 'em or fold 'em? Any comments welcome.

Jan 05 07:02 PM

[David White:]

Pharmboy: My general thoughts are that this is an Obama stimulus package rally. Now they are talking about the package not being approved until February. This could put some near term pressure on the rally, especially since the SPY is already in short term overbought terrritory. However, the long term SPY is not in overbought territory. The rally may extend to the inauguration (or even into February). The length of the rally would probably determine your sell point, since DRYS has a Beta of 2.0. As for a sell point, the daily chart shows over head resistance at around $17, $23, and $25. If the general market rally goes far enough DRYS could easily reach $23, which was a fairly major peak on the way down. As for the SPY, there is a minor peak around $95. However, the first major peak (resistance) is at about $100. I am currently hypothesizing that we are going to reach that peak at some time during the current rally. Good luck.

Jan 06 02:25 AM

[David White:]

I probably should have mentioned that there was some realtively hidden stimulus news today. The Fed will buy up (is buying up) to $500B in "good" real estate loans from Fannie Mae and Freddie Mac in an effort to bring down mortgage rates and to increase lending.

Jan 06 02:30 AM

[Mark Anthony:]

Why concentrating only on one dry bulk shipping stock, DRYS. This is of course one of the best known shipping stocks. I have made the perfect call of DRYS a while ago:

seekingalpha.com/artic...

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.

Jan 06 02:30 AM

[David White:]

Oh there was also a MarketWatch article today that tabbed EXM as one of three likely huge upside movers in this rally (top January turnaround picks). You might want to consider EXM too.

Jan 06 02:34 AM

[Mark Anthony:]

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.

Jan 06 02:41 AM

[David White:]

PharmBoy: I probably should have advised you to also watch the Baltic Dry Index. As this trends, so trends DRYS. DRYS will mostly follow the Capesize trend. DRYS also publishes this index everday on their web site.

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.

Jan 06 02:55 AM

[David White:]

Macke is right sometimes, and he is wrong sometimes. You also have to take into account time frame. Macke is generally advising people about relatively short time frames. He is probably also not advising people to sell their whole stake, but rather a part of it. If you got in at the low, you can ensure a profit by selling some along the way on the way up. It sounds like this guy has been holding DRYS for a long time. He may as well see if the rally will take it higher. He should be able to monitor the rally (SPY, or S&P500, etc.) and the Baltic Dry Index to determine when a logical place to sell is.

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.

Jan 06 01:05 PM

[David White:]

dividendmachine: Do you really think they would pay Macke to opine on TV if he didn't act sure of himself all the time. People watch to be guided and reassured. A waffler simply wouldn't cut it. Just look at Cramer. Those guys are still wrong a lot of the time. Do your own work to complement theirs. Often those guys are just quickly jumping on and off the bandwagon. That way they don't appear to be stupid for too long. They know their business. However, you can bet the top people at GS are a lot better. Plus they are not experts at everything. Some areas they know better. However, they pontificate on everything as if they are experts.

Jan 06 01:17 PM

[David White:]

dividendmachine: Also as I said in one of my first comments above, the market is currently overbought in the short term. However, it is not overbought in the long term. Most people think this rally still has legs. Perhaps you or Macke know better. We will see. Be careful you know what kind of advice you are getting (i.e. long or short term) before you try to apply it.

Jan 06 01:24 PM

[Chris B:]

How much of the dry shippers' stock prices can be explained by the Baltic Dry Index and how much can be explained by chart zig zags?

I rest my case.

Nonetheless, I'm long ESEA.

Jan 06 01:29 PM

[David White:]

As an example, these same people gave a consensus oil price estimate of $135 for early September in June or July. They were only wrong by about $40/barrel. Of course, a lot of people were wrong about that. Do some work on your own. They are trying to follow trends just like you.

Jan 06 01:31 PM

[David White:]

The importance of the iron ore pricing is that prices should be lower this year. China, after they agree on pricing, should start to import a fair amount more iron ore. Naturally they do not wish to do so at the higher prices of last year. This should be a boon for shipping.

Jan 06 01:36 PM

[David White:]

Agreeing on the iron ore price will also be a signal that the Chinese will soon thereafter want to import more metallugical coal (i.e. to make the iron into steel, etc.). This will also be a boon to shipping.

Jan 06 01:43 PM

[David White:]

As a counter example to Macke, a Robert Maltbie (supposed to be an expert) article on MarketWatch yesterday touted EXM as one of the top January turn around plays (i.e. it should go up a lot). DRYS is a very similar stock to EXM. The same advice would apply to both in general terms.

Jan 06 02:36 PM

[David White:]

For general information, RTP, BHP, RIO, etc. usually sign one year price agreements for iron ore with the big manufacturers in China and Japan (Korea too I think). This is supposed to cut down on the haggling work necessary to buy and sell iron ore. Obviously it does not mean that no iron ore is then sold for lower prices. However, the companies generally stick to these agreements.

Jan 06 02:43 PM

[User 265729:]

Sure they are...

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...

Jan 06 06:24 PM

[Freedoms Truth:]

"My general thoughts are that this is an Obama stimulus package rally. "

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.

Jan 07 12:43 AM

[Jonas:]

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.

Jan 07 06:39 AM

[User 332735:]

really, up from 5 to 15 , and "it's poised to rally".

No wonder the media is laying off you guys. cutting edge, really!

Jan 07 09:15 AM

[poor&unempl...:]

If wishes were horses...................


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.

Jan 07 09:42 PM

[PharmBoy:]

Mark, my average price being what it is, is due to me buying 100 shares to start, then only 50 at each of the lower price levels. I didn't buy equal position sizes each time. That being said, hindsight is 20-20. Who could have known that DRYS would storm back so hard, so fast. They say not to average down on your losers, so I kind of took the middle ground. Buy some more, but don't bet the house on it. That being said, if you were smart enough to back up on the truck at 3 and change, nice one!!




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.
>

Jan 11 03:27 AM