Potash: Looking for Lower Prices

The purpose of technical analysis is to use past action to predict future performance. Anyone who has tried extrapolating from the past to the future knows the process is fraught with risk. As exhibited by the nationwide fall in housing prices, the first since the Great Depression, if historical relationships change, expected profits can quickly turn to losses.

Knowing this risk, when we enter into technical trades, we must constantly watch market action to determine whether or not our initial thesis was correct. If the markets behave in the manner we predicted, we can maintain or build upon our positions. If not, we are better served to exit the trade.

An example is the decision cited in the February 9 issue of my weekly newsletter EPIC Insights to short Potash (POT). When I reviewed POT's chart, I saw clear resistance at $94.

[click to enlarge]

When I entered the short, POT traded at $92. This allowed limited downside risk if the stock moved through resistance, yet great reward if the price broke lower. Since then, resistance held and the price broke lower to deliver a three-week return of 17%.

Pleased with the correct call, I now question whether this drop captures the downside or a greater fall will occur. To divine the answer, I reviewed the performance over a shorter time period.

[click to enlarge]

Over the past two months, POT has seen resistance from the 10-day moving average (MA) and support from the 50-day MA. Each time the stock traded toward the 10-day MA it has been turned lower (blue arrows). When it trades to the 50-day MA, it moves higher (green arrows). This pattern has served as a tight band to guide the stock price.

During Monday's market rout, POT fell through the 50-day MA (black circle), a key turning point. When long-lasting support levels fall, stocks often move violently lower. If this occurs, we should expect to see POT retest its 52-week low of $49.60 in coming weeks.

For now, watch for any rebound that brings the price toward the 50-day MA (currently $77.80). With the stock rallying Tuesday, we saw the advance turned back by this price point. Support has morphed into resistance and the path of the stock will continue moving lower until POT proves it can rally past the declining 50-day MA. Until proven otherwise, the trend remains bearish and a move into the low-50s lies ahead.

Comments

[L.L.:]

POT---All countries will need fertilizer for the growing season--POT should resume its upward trend because of demand--At leasy that is my thinking--L.L.

Mar 04 09:19 AM

[L.L.:]

FRO has cut its dividend tp 6%--so I read L.L.

Mar 04 09:22 AM

[mr clark:]

Potash is too expensive in this global crisis, especially considering grain prices...

Mar 04 11:44 AM

[Jeez:]

Wow what an analysis!

"pattern has served as a tight band to guide the stock price." - who all can see this as a tight band? I need new glasses!

Mar 04 12:51 PM

[d.t.:]

Now, that Uralkali blinked, POT will probably have no choice but to accept lower prices from the Chinese - for at least 2009. Maybe, as much as 25% lower. At this possible new price the stock is way too expensive.

Mar 04 04:06 PM

[Polaris:]

I think not.

1. Uralkali is only a small player in the pot market.

2. I understand that the Uralakli offer is only for the period March-May.

3. The fate of the US market is already sealed - the distribution channels are full at last years prices and there is not time to restock for this season AND dealers will be reluctant to take a big hair cut now.

4. Potash Corp have already indicated that sales in Feb March would be lower than normal

5. Big push in sales will be in May June by which time Uralkali will have reduced its inventory and be less of a threat to price stability.

6. Conclusion - Uralkali can get away with a price cut without disturbing the market the now - BUT there is no benefit to Potash Corp or Mosaic in following suit - best play is to wait for the May contracts and go for the big prize.

Mar 04 04:55 PM

[Bughunter:]

I'm a fertilizer dealer in the midwest, phosphate has dropped 60%, nitrogen has dropped 66%, and sales have resumed. Corn has dropped 60%, tell me why potash producers in north america can't figure it out, there may be 2 yr supply on the wrong side. good luck finding any valure in this market. I am going to sell at the right price. I just do not know what that is. Good management of just greedy ?


On Mar 04 11:44 AM mr clark wrote:

> Potash is too expensive in this global crisis, especially considering
> grain prices...

Apr 03 02:40 PM