Adding to My Short Position in Potash

There are many brilliant people involved in the investment business. Looking to display their mental prowess, some overintellectualize and complicate. Having always felt simple explanations trump elegant ones, I try to avoid overcomplicating my decision-making process.

With respect to technical analysis, I often look for simple trends, moving averages, and key price points to serve as the basis for my investments. One of my key tenets is trade with the trend and watch support/resistance levels. The trend ensures the market is moving in our favor, and support/resistance levels may signal impending reversals. When a stock consistently rallies from a key support level, investors use that price as a safety measure. For a stock to move higher, support must hold. When support fails, two key events take place. First, a downward trend quickly accelerates. Second, the prior support level now becomes resistance.

With Potash (POT) both events are unfolding. After peaking above $90 in early February, POT developed a clear downtrend that has guided the primary trend lower. Within this trend, POT made multiple attempts to stabilize and rally. Looking at the past four months, the 50-day moving average (MA) served as support while the 10-day MA acted as resistance. When the price moved toward the 10-day MA, the rally stalled and prices headed lower (blue arrows).

Also, when the stock moved lower, the 50-day MA acted as support and pushed the price higher (green arrows). When the support finally failed (black circle), prices cascaded lower and led us to close 50% of our short position, as I recommended in my weekly newsletter EPIC Insights. As the stock moved higher last week, we saw a key event unfold: the 50-day MA that acted as support for so long has now become resistance and stopped multiple attempts by POT to violate the downtrend (red arrows).

With the 50-day MA effectively serving as resistance, we should expect POT to test the 52-week low over the coming weeks (the box on the graph). Expecting the downward movement, I will increase the current short position. Having covered a portion of our short near $64, the current increase in the stock will allow us to reinstitute a large short at a much higher price. I recommend increasing the short POT position as this week's technical trade.

[click to enlarge]

Comments

[abetterplace:]

It would be oh so nice if it were this simple, but it's not. Potash being the mineral it is, a high volume essential for growing evermore food for an ever increasing population, is capable of trend reversals on a moments notice of good or bad inventory reports just as any other natural resource.

Good luck.

Mar 16 07:35 AM

[Tructor:]

PCS Phosphate's mine in Eastern North Carolina may not be granted permit to mine the next layers of phosphate. This open pit mine is the world's largest. If permits are denied, that may bring a shortage of phosphate and potash. Your "short" strategy could be short-lived.

Mar 16 08:39 AM

[More Caffei...:]

I concur with Abetterplace regarding the quick reversals both + and -. Plus, the secular fundamental drivers in this chemical (potash) are going to work against short positions. Watch out for news flow this spring regarding increased fertilizer utilization; which would improve pricing trends of potash. A lot of farms cut back last year as potash prices soared and now that prices have deflated the farms need to return to using more fertilizer to improve crop yields.

Mar 16 08:41 AM

[lady driver:]

I agree with abetterplace,and add that seniment drives this market not charts. Sorry can't jump on this train my gut tells me otherwise.

Mar 16 09:00 AM

[bluetick:]

Nitrogen & phosphate prices have dropped dramatically since last fall, but the potash price has dropped little if any. For that reason, potash usage in North America will be drastically lower this spring. Look for earnings to drop likewise in Q2 for the potash producers. All said, the farmer has the last word, and he will show the producers that he can live without potash for a year. The producers can likewise live with lower sales for a year, but it won't be pretty.

Mar 16 10:53 AM

[John Polomny:]

I have no idea if Mr. Hannon's short term technical view is correct or not. What I find more valuable is the quarterly market report on the Potash website that talks about how yields drop off significantly if farmers withhold nutrient application. As an investor I am concerned about owning a fractional piece of a this company's future revenue stream. I see the pressures on grain productions only worsening over time. In creases in yield will only be accomplished by timely application of the nutrients this company produces.

Mar 16 11:19 AM

[phaf:]

Regarding your first paragraph, I agree that simple explanations are often correct. However, simple and elegant are not mutually exclusive. Simple solutions are often the most elegant.
Otherwise, an interesting piece.

Mar 16 05:38 PM

[Fighting Yoda:]

We are in a deflationary, recessionary environment, can’t be bullish on Potash, or any other commodity. Can it come back to its recent lows – yes ofcourse.

Will consider buying it in low 50s, not higher.

Mar 17 04:36 AM

[Moon Kil Woong:]

I would tend to side with the author. I'm actually wondering if China will loose again when negotiating it's Potash contract. I have a feeling they will get the upper hand since demand is dropping not rising.

Also isn't Tructor's argument bad for Potash? Don't they own that mine? If so, even if prices rise because of limited supply isn't that still bad for the supplier even if it's good for their competitors?

Mar 17 04:38 AM

[H.J. Huneycutt:]

I won't dismiss Sean since he's written some pretty good pieces before, but admittedly, I'm rather disappointed by his argument here. It completely relies on technical analysis and ignores the actual fundamentals driving Potash.

However, I will say that I think IPI, MOS, and AGU are better bets than POT if you want to go long in that sphere. POT seems to be more aggressively priced than the others.

Mar 17 08:56 AM

[mr clark:]

the most amazing thing is how much potassium is already available in most soils, especially if farmed organically using cover crops etc... the reason industrial farms use so much is that they are overfarming their lands and using chemical fertilizers, that result in tying up available potassium in salt form, and creating hardpan that also blocks roots from nutrients

of course, farmers are hurting too and not buying as much fertilizer as well until crop prices rise

Mar 17 11:17 AM

[inexperienced:]

Saskatchewan Hillbilly
I live in a small Sask. town (450 people) about 60 miles south of Lanigan mine.We have 2 potash mine workers from there, they where given the choice 2 months ago, between layoffs or maintenance.Another mine I drive by regularly Colonsay (Mosaic MOS-NY) they've been storing cars on there CNRail siding for over 2 months, there CPRail siding is open but I have'nt seen cars spotted all winter.And now something I haven't seen for alot of years, no smoke,chimneys just standing with no smoke!
I think China and POT are staring each other down,waiting for the other to blink.Who it will be I'm not sure, but one thing I'm sure of is that logistic are gone for this year(time to get potash to chinais farmer in time for crop)
In regards to Tructor's comment I'm a farmer my phos.program this spring will be 50% less with Avail making more plant available.

Mar 17 01:08 PM

[MarkGillCPA:]

I agree that it's important to keep it simple with technical analysis, but I disagree with his conclusion. John Murphy, who has written numerous books on technical analysis also states that it's important to to use simple trendlines and moving averages. However, he also states that the longer a trendline, the more relevant it is. In this case, I don't believe your 5-week trendline is long enough to be relevant other than for short term traders.

On a weekly chart, the severe downtrend appears to be broken in December. On a daily chart you could draw a support line starting at the 47.47 low in December and the 63.65 low in March. Then you could draw a resistence line at 95, which goes back to November. The result would be an ascending triangle, a bullish pattern that covers the last 4 months.

Also, before buying any of the fertilizer producers, check out DBA, an ETF of ag crops. It appears to be putting in a head and shoulders bottom. At stockcharts.com you can overlay POT on the DBA chart and see that there is a tight correlation. Crop prices need to improve before farmers will use more fertilizer. If DBA breaks 27, POT will break 95 to the upside.

From a fundamental basis, a word of caution. POT likes to claim that farmers are not that sensitive to fertilizer prices because of the yield improvement. But that's not true. Farmers will pay up for fertilizer only when crop prices are high enough to cover their input costs. That's why I link POT to DBA.

Last year, when fertilizer prices were so high, some farmers here in the Texas Panhandle began using cattle manure as a substitute to save money. Not as effective as chemcal fertilizers (and comes with a different set of issues like weeds) but it will work.

Now that fertilizer prices are lower and crop prices appear to be putting in a bottom, there might be a nice upside opportunity in POT.

Mar 17 01:47 PM

[PROXIMO:]

Potash stock price will be largely determined by supply and demand factors for its products, and by the stock market in general. A huge short term swing in the stock market, in EITHER direction, would render the author's chart analysis moot.

Mar 17 01:48 PM

[Stone Fox C...:]

had to argue that the chart has been weak and will probably be a good guide on POT. Long term i think most people believe that POT will be a huge winner, but at the moment it appears that reality hasn't set in on POT. Rodgers might be correct about farmland and farming, but probably not this year.

Mar 17 05:42 PM

[BxCapricorn:]

This caught my eye because I completely concur with your technicals on POT. Despite people saying, "the world's gotta eat..." if you look around, they have plenty in reserves. Like the farmer said, tight credit means less planting, means less fertilizer, etc. The cycle feeds itself (pun intended).

Mar 17 10:03 PM

[manuel:]

if you read what wikipedia says about fertilizers it does not seem that chemical mineral fertilizers hurt the soil and if potassium would be available as you say do you think farmers would have payed 3 times its price last year? I think there must be a strong case in using potassium besides overfarming, do you think farmers would destroy their most valuable form of asset, their soil, just to overfarm a few years?


On Mar 17 11:17 AM mr clark wrote:

> the most amazing thing is how much potassium is already available
> in most soils, especially if farmed organically using cover crops
> etc... the reason industrial farms use so much is that they are overfarming
> their lands and using chemical fertilizers, that result in tying
> up available potassium in salt form, and creating hardpan that also
> blocks roots from nutrients
>
> of course, farmers are hurting too and not buying as much fertilizer
> as well until crop prices rise

Mar 18 08:22 AM

[Barry Isaacs:]

It appears that this recommendation had a pretty short shelf life. POT is trading above its "resistance" level/50 dma. With the overall market showing signs of life for a change, there is no reason to expect POT to keep moving lower. So much for the charts.

Apr 02 09:56 AM

[commercialf...:]

prices on crops using potash are down 30 to 50 %. farmers are aware of the law of diminishing returns which is used to calculate the optimum level of inputs. Simply put, that level is reached when the last $1 cost of the input returns $1 of income. Beyond that point, yield may increase but profit decreases. As an example, alfalfa in California and other Western states was $250 per ton. This year it is half of that price. You can't expect application rates (pounds of fertilizer per acre) to remain the same. Do the math. Furthermore, potash prices have historically been about 50% of the cost of the phosphorus complex. It is now double the cost of Mono ammonium phosphate (11-52-0). The phosphate fertilizer pipeline was totally full, with dealers having to pay demurrage on barges because there was nowhere to go with the product. So the price dropped to reflect demand. Last year $1200 per ton for 11-52-0, this year $420. Production kept going, the product moved through the chain to farmers worldwide. Potash producers, on the other hand, laid off thousands of miners, closed mines, and held inventories while living off their fat checkbooks from the boom of last year. POT balance sheet looks good with their inventory priced at last year's level, but divide that by three and look at 2nd qtr 09 financials. I'm not a stock trader, but I know as an ag producer what I can afford to pay for inputs. This year we used phosphorus, sulfur, zinc, manganese, and boron in our formulations. No potassium.


On Apr 02 09:56 AM Barry Isaacs wrote:

> It appears that this recommendation had a pretty short shelf life.
> POT is trading above its "resistance" level/50 dma. With the overall
> market showing signs of life for a change, there is no reason to
> expect POT to keep moving lower. So much for the charts.

Apr 02 03:17 PM