When examining a daily chart of Dow Chemical Co. (DOW) it seems primed for a nice short term move to the upside. However, when you analyze a weekly chart, it tells quite a different story. One can feel somewhat conflicted about whether to long or short this issue. Therefore, why not do both. I have provided a daily and a weekly chart for your perusal.
At first glance you might ponder that Dow Chemical has been accumulated at its current levels and as a consequence the stock will be distributed at higher levels. Yet when you view the weekly chart, you will see a classic head and shoulders pattern which I believe will complete. Head and shoulders patterns are well known reversal patterns marked by three prominent peaks. The middle peak (the head) is higher than the other peaks (the shoulders). When the trend line connecting the troughs at the bottom (the neckline of the pattern) is broken, the pattern is complete.
I anticipate that the head and shoulders pattern will complete. However, before it does I believe that Dow Chemical will advance to $32.95. This is because the Designated Market Maker will most likely use an institutional distribution channel to unload his stock and there must be enough inducement to arouse the interest of the investing public. This will be accomplished by raising the price. Additionally, there must be enough incentive for the insider institution to move the inventory. I suspect an advance of 7 to 9 percent will suffice nicely in both instances. Since it is rising prices that creates demand, the price will be advanced just long enough for the institution to sell off this inventory. As usual, the Designated Market Maker will fill the excess demand by shorting Dow Chemical so that he can profit from the decline.
Although one might reasonably assume that Dow Chemical Co. has been accumulated, I believe it is more likely that it has been extensively distributed. In addition I believe that the subsequent albeit brief advance will be an attempt to keep the public believing that the accumulation was authentic. It will move lower in lock step with the broader market when the decline which I believe is imminent manifests itself.
As you can see in the matrix of block data I have provided, the blocks of June 21 are indicative of a very important merchandising stance (most likely a distribution) being established by an insider at the highs. The block of July 27 appears (at least to me) a bit inconsistent and thus requires more scrutiny. I believe it is the driver for the short term advance. The Designated Market Maker probably had to absorb more stock than he wanted or expected and the block on July 27 is the short covering. He will advance the issue in order to distribute and reestablish his short position, at which point he will resume the decline in order to achieve his downside price objectives.
The blocks displayed in the matrix are a small subset of the overall mass of blocks which have traded in this issue. There were numerous blocks in the 500,000 and 1,000,000 share range. If I were to include them all it would require several pages. As I point out in my book, a series of ten one million share blocks serve the same purpose as a single ten million share block.
On the Basis of the foregoing these are my views and observations:
The Long Trade:
I recommend establishing a long position in Dow Chemical Co. This is a very short term trade. Open your position with only 1/4 of whatever capital you intend to commit to Dow Chemical Co. at $29.08 or better. Purchase the remaining 3/4 of the position at $26.75 and stop out at $25.66. Do not post your stop out. I have said it before, but it is so important that at the risk of being redundant I will say it again. It is too easy for the Designated Market Maker to cash investors out by moving the price above or below your stop out and move the price right back down or up again. In addition, when a stop out is triggered it converts into a market order and that could be disastrous if the Designated Market Maker decides to really take advantage. Remember the "Flash Crash"? I would be looking to exit the trade at an upside price target of $32.64. Do not allow this position to exceed 5% of your overall portfolio.
The Short Trade:
I recommend establishing a short position in Dow Chemical Co. Open your position with only 1/4 of whatever capital you intend to commit to Dow Chemical Co at $32.64. Purchase the remaining 3/4 of the position at $35.25 and stop out at $36.63. The same rules with regard to stop outs apply. I would be looking to exit the trade at a downside price target of $25.66. Do not allow this position to exceed 5% of your overall portfolio.
There is always the possibility that the trade may not work out.
There Is Never A Sure Thing (particularly on a short)
Investors must realize and recognize that there is never a sure thing. Sometimes events that have a low probability of occurring bring forth very serious consequences should they come into being. Investors must judiciously consider what the inherent practical limits are and how much they stand to gain in relation to the risks involved in establishing any position.
In addition, persistence can become desperate folly by allowing a losing position to become a viable argument for deciding on a new position. Rather, such decisions should be based on the current and soon-to-be circumstances.
Any position in which one unexpected factor has a significant impact on your portfolio is the result of poor planning. It is a fault most commonly associated with people who want to explain away their losses. SUN TZU -Art of War "Use an attack to exploit a victory, never use an attack to rescue a defeat."
If you follow the process recommended and the trade does not work, the overall loss in this model is $3,000.00. That amounts to 0.3 of the overall portfolio (theoretically valued at $1,000,000).
And finally, never be a brave and brainless investor because a fool and his money are soon parted.
A portfolio of $1,000,000 should position size in the foregoing manner.
This is a trade, not an investment. Be ever vigilant.
That's it for now…. Have a nice day.