Taking Prudent Approach: Exiting Potash

Investing is never easy. Even if we apply thorough, well-reasoned analysis, the possibility exists that the markets will invalidate our thesis and move against us. Knowing this, we are pleased when our approach delivers a trade that acts as expected and yields substantial rewards. An example is the short of Potash (POT) first recommended in my weekly newsletter EPIC Insights.

As I detailed in an article on Seeking Alpha last week, the initial trade occurred when POT was trading close to a long-standing resistance level, thus offering limited risk but immense upside potential.

A principle I have often discussed is that when an important technical price point falls, dramatic movement occurs. This belief allowed us to exit First Solar (FSLR) prior to a large sell-off and will enable us to determine a price target for POT.

With POT moving below the 50-day moving average, prices have cascaded lower. As there is no discernible support, we can expect the shares to retest their lows ($49.60) in the coming weeks. Having already seen a 28% return on this position, the ultimate collapse would yield substantial gains. If we were investing in a vacuum, the clear decision would be to allow POT to continue sinking and squeeze every dime of gains from this position.

However, we do not exist in a vacuum. I have often stated that we are in a range-bound traders' market where quickly realizing gains will allow us to accumulate outsized returns. With the market oversold and in need of a rally, I will not allow hard-fought gains to be surrendered as we attempt to squeeze every penny from this trade. Instead, I recommend a prudent approach that will allow us to benefit from a further drop in POT while also moving money off the table. To satisfy this dual mandate, I recommend closing 50% of the short POT position as this week's technical trade

Comments

[jatt raider:]

nice way... to short here.. you know.. it there would be a short squeze... and you would get fried.

Mar 09 06:24 AM

[WACG:]

I am pleased to see a shortie over analyse a situation and get burned. LOL! have a nice day.

Mar 09 09:49 AM

[bluetick:]

Potash Corp needs to look no further than last Sep's $250/ton price increase to find the error of it's ways. A close parallel would have been for the oil co's to increase the price of gasoline to $6/gallon when it was selling at $4. The potash market was straining to sell potash to farmers before the $250 price increase, but Potash Corp, in a typical show of arrogance, thought potash was the new gold, and took an almost 50% price hike. Guess what? Their phone stopped ringing,their customer's phones stopped ringing, mines had to be shutdown, (a prolonged miner strike actually delayed the shutdown), sales went to hell in a handbasket, inventories maxxed out, and the customers of Potash, who get the product from the mine into the hands of farmers and onto the ground, have been slaughtered by destruction of demand and falling value of inventory. Thanks Potash, congratulations for killing the golden goose.

Mar 09 09:50 AM

[nova:]

As for technical analysis, even a broken clock shows perfectly correct time twice every 24-hours. Just ask Wall-Street trading artists.

In time of economic trouble, it is absolutely vital to feed people. Otherwise, it is unrest and slaughter of politicians and society elite.

In my book, before is is all over, commodities and agriculture will get away like bandits.

Mar 09 10:15 AM

[urbanhiker:]

Come on, you got lucky, that's all. Last week the Belarusian Potash corp. decreased it's price to Brazil by 25% causing all potash companies' stock to decline. Don't quit your day job.

Mar 09 06:48 PM

[Jeez:]

What an article! Did you get paid "by the words"? Anyone could have said what you said in a para. What a waste of time.

Mar 09 10:43 PM

[mr freddo:]

POT is going to be fine. With a P/E of 6, there is not much speculation in the price and thus minimal upside for short sellers and maximum downside.

Mar 10 03:14 AM