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 (NYSE: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 (NYSE: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.