PotashCorp and Mosaic: Get Your Orders Ready

It's about that time again - time to set the buy limit orders for the fertilizer names. Yesterday marked what I believe was the first day of the next round of profit taking in these names. Now, don't get too anxious as we still have a little ways to go in terms of retracement. However, with analysts at RBC Capital Markets upgrading PotashCorp of Saskatchewan's (POT) price target from $300 to $340 on Thursday, it is very likely that we have seen the near-term top.

Having been in these names since last August, I've really gotten a feel for how they trade and have developed a rinse and repeat strategy for selling off half my position at new highs, and then buying back those shares on the retracement. This strategy allows me to maintain a core position at all times while still trading around the ups and downs the name experiences, truly maximizing my profit. Having just seen new highs in fertilizer companies PotashCorp and The Mosaic Company (MOS), I've taken profits last week and am now waiting for the inevitable pullback. As MOS pulled back 6% and POT 2% yesterday, I believe this next round of profit taking has begun, and now is the time to check the charts to find the best entry points to get back into these names in the coming days or weeks.

In POT, we've seen new highs of around $240, blasting past previous highs of $220. In addition, this is exactly where we start to look in terms of entry points. Typically, after making new highs, stocks will sell off due to profit taking and consolidation. These retracements often trend down to the past highs, where they find a level of support. Those previous highs marked places of previous resistance, which have now become future support.

As you can see from the chart, the green line drawn across $219 or so signals the high reached before the one we've just now hit. This is the first entry point and therefore, I am placing a limit buy at $219 for 1/4th a position. The other 1/4th a position I reserve for the 50-day moving average at or around $205. In terms of stochastics, if you look at the very bottom part of the chart, you will see that each time the stochastics reach oversold conditions around or below 20 (green circles), it has indicated a buying point. Obviously, right now, we are very overbought and due for a correction. Thus, we must wait for either our entry point at support, or for when stochastics give us the buy signal.

MOS has a very similar pattern. It has reached new highs of $160, blasting past previous highs of $144 or so. That level represents our starting point for looking for entries. The green line I've drawn is our immediate entry target, at around $140. This is placed at the past peak, which was past resistance and is now future support. I have a buy limit order there for 1/4th a position and the other 1/4th of a position will be placed with an order around the 50-day moving average around $132. Looking at stochastics at the bottom of the chart, we see oversold conditions represent buying opportunities (green circles).

Therefore, our entry orders will ideally coincide with stochastics showing oversold conditions around 20. Do note though that with MOS specifically, for whatever reason, it often breaches the 50-day moving average and then trades back up higher, rather than bouncing crisply off the average. This is yet another trend I've noticed if you look at a chart that spans a longer timeframe. Therefore, this is something to keep in mind when placing your limit orders.

That's all there really is to it. Just set your limit orders and forget about it. Eventually in a few days or weeks, the selloff will trigger your order and you can check back in on the stochastics to gauge how much profit taking is left. Now, keep in mind that these stocks could very well throw logic out the window and continue marching higher without completing the retracement. But, I've found this game plan to be pretty effective overall.

Disclosure:  The author owns POT and MOS.

Comments

[thomas728]

Fundamentalist: "I would not want my sister to marry a technician !"

Technician: "I would not want my sister .....(you know the rest).

As one who could write his knowledge of charting on the back of
a stamp with a crayon, I suddenly feel a need for at least a yeoman's understanding.

Why ? If these people "have it" I want in ! If, however, with this new found "tool" their predictions, based on volume, price,time,etc. prove less than acceptable for purchase and sale, I can advise
my sister accordingly.

Good investing be yours,

Tom

[User 207017]

Nicely done - Monsanto reports on June 25th - that could be a key date as in the past when one of the ag plays did well, the rest of the sector got a boost. Fed meeting and meeting in Saudi this weekend should all play a role in how this trades. Furthermore, the DOW approaches a key technical point 11740. All told, could be an interesting week next week. Nice work on the analysis.

[WACG]

NONSENSE!! There are so many reasons why looking for "predictive" price patterns in a chart is a losing exercise that I do not know where to begin. Looking for patterns in clouds as they float by is at least relaxing. Change the time scale and you change the "pattern". What would become of all this chart baloney if stocks traded 24 hrs/day and there were no open and close prices on which to draw the little lines? Would stock values be different? Would their price movements change behaviour? I think not but the "charts" sure would. Believe this crapola at your own risk.

[Tim Plaehn]

What will happen to the fertilizer companies when the millions of farm acreage now underwater up and down the Mississippi valley do not get fertilized this year. If these farms typically have $50 per acre of fertilizer, you are looking at $100's of million of lost sales. I do not think the market. Which companies are going to eat these lost revenues and continue to grow profits?

[leh]

Jees, a lot of ignorant heckling from the peanut gallery in response to an interesting post based on one trader's real world experience.

Like it or not, technical analysis is useful (and widely used by almost all serious traders), so ignore it at your own risk. All TA really does is visualize price and volume in various ways; the interpretation itself is something of an art. If it's working for this poster, more power to him/her. It's just another tool, people--nobody's calling it a crystal ball.


and based purely on price and volume

[User 155473]

Like it or not, emotions play a big role in price movement of stocks. You can't account for emotion using fundamentals. You CAN account for emotion using technicals, however. As said, it's not a crystal ball, but it is a useful tool. Choosing to ignore technicals altogether is a recipe for sub-par investing.

[marketfolly]

WACG - i am in these names for fundamental reasons to begin with. i have simply noticed a technical pattern of the past months that seems to continue to play out, so i take advantage of it to help maximize profit

tim plaehn - these producers have pricing power. if someone in the USA doesn't want to pay the high prices, they take it overseas. the demand is that real. so, the same logic applies to the farmers in the USA not needing any. the overseas markets WILL need it. so the fert producers sell there. limited supply + high demand = pricing power for producers.

leh - exactly, good points. i use a hybrid style of fundamentals and technicals. fundamentals to provide me an investment thesis to get into the name to begin with, and then technicals for entry/exit/price targets/stops

[mythoughts]

Good article! But I haven't got the guts to sell my MOS or CF.

[syjcca]

If one is concerned about cash on a regular basis, one should forget about putting money in the stock market. If the fundamentals of a stock is good eg., ag. shares and the future trend is looking good, what's the point in constant trading based on charts and anticipation. One merely needs to keep the eyes opened and watch for any new or extraordinary development.

[User 155643]

a new fertilizer ipo is ipi. they are small compared to pot but they will be considered the biggest ipo of 2008. check them out.

[marketfolly]

syjcca - point taken. it really depends on people's investment styles. my personal style is a hybrid. i could fully just sit and "buy and hold" these names. but, i'm just using other patterns i've noticed to my advantage. taking profits is a smart thing to do along the way anyways. then you buy back on dips.

all depends on one's individual style really. and its not "constant trading"... only occurs every few months, a time frame where you should be naturally taking profits if you have them anyways

user155- yea well aware of IPI. already have fertilizer exposure though. will monitor them to compare though and swap if they outperform the others ;)

[The Italian Investor]

I own POT (214 USD is the entry point) from Italy and damn the day when I did not buy them ay 135, a precious few months ago. Presentations on the company site and research (Merrill Lynch has posted a new target price at 300 USD, plus that Lee guy of RBC which puts it at 340) make me think positive for the medium term ( 3-5 years from now, at least).Fundamentally speaking, I will increase my position.
I think a stock-split ( 3-1 or 4-1 would do) would help boost price, and I do not forget the on-going share buyback.
Definitely a stock to own and to buy on weaknesse, that's what I think.

[mariposa]

Different strokes for different folks, but if you don't understand something be sure to criticize!

[huerix]

I agree that IPI will be huge, Potash pure play.

PS- tons of flooded farmland means they need more fertilizer eventually.

[Thinking ahead]

I've been doing this same thing for years (although not on MOS -- yet), Yikes! I'm a chartist! Is there a secret handshake or something?

[Jtaylor]

Has anyone hear about a stock split on any of these companies. I'm very happy with the returns but I also believe the stocks would do much better if they were priced lower. I like the charting and TA but just do not have the time...I do believe in it though. I bought the following in my Roth IRA at the average cost per share listed.

AGU $39
MON $64
POT $75
MOS $44

[pshah]

Marketfolly, I have read this piece of yours with interest and have tracked POT and MOS since. They both looked like they have hit the buy point based on your theory and the tracked indicators.

Are you opening these positions now? Thanks

[marketfolly]

pshah, correct I am. They are hitting their 50 day moving day averages and are ripe for entry. The market is finally selling off the strong sectors and this is what people like me have been waiting for. This is the same cycle that played out a few months ago... first the financials and weak sectors get sold off, then finally the strong sectors become weak as well. Use that weakness to your advantage.

[Inv Mex]

Market Folly. What's the deal with pot and mos? Would appreciate your sentiments.