Potash (POT) was a highly watched, profitable stock from 2007 to mid-2008.  However, as the commodity markets began falling sharply, so did shares of Potash, destroying profits and sending prices plunging from $240 to $80 in four months.  Let’s see these developments on the Weekly chart as well as potential support both from the weekly structure and a potentially completed Elliott Pattern.

Potash (POT) Weekly:

The strong and pervasive uptrend since late 2006 terminated in mid-2008, and price came down to test the rising 20 period EMA (a strategy which had been ultra-successful) and then failed at that level, setting up a “support trade” or “magnet trade” to test the rising 50 period EMA which succeeded… until price found resistance yet again at the (now) falling 20 period EMA (two tests).

After price broke beneath the 50 week EMA, it set-up yet another ‘magnet’ support trade to test the rising 200 week SMA – however unimaginable this was.

Price is now finding potential support (as expected) at these levels (roughly the $75 per share level) and we appear to be due for a counter-swing back up to a key Fibonacci retracement of the prior swing down.

The Daily Chart shows this recent plunge was part of a clean Elliott Wave structure.

Potash (POT) Daily:

First look at the larger 5-wave impulse and then note that Wave 3 sub-divided into a 5-Wave impulse move down itself.  Notice also that a positive momentum divergence formed as the sub-wave 5 terminated into new daily price lows (before the counter-wave 4 up commenced).

At the moment, we could be terminating Wave 5, which is the End of the Elliott Impulse and could be stepping into an A Wave Up correction (followed by a B wave down then a C wave up – I haven’t drawn these on the chart).

The A Wave up could take price to the $120 – $130 per share level before finding potential resistance and then coming back to a B Wave back down.

Notice that price made a new momentum low on the daily chart. which underscores the ferociousness of this downtrend and the violent recent downswing from $180 to $90 (roughly a 50% decline) in less than a month.

Potash also offers (at least) two quick investment lessons:

1.  Just because a stock is popular and is ‘going up’ doesn’t mean it can’t come down… HARD

2.  Don’t double-down and try to keep calling a bottom, thus eroding capital.

If you thought this stock would continue going up at any point, that was fine, but you could not have let the prior move or public opinion (or the TV) cloud your judgment – take your stop-loss and move on.  Don’t try to force your will on the market or a stock.

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Just when you thought the trading day couldn’t get any weirder… price gaps down strongly (and likely unexpectedly) in the morning, forms a trend day virtually all trading day long, and then destroys the trend-day down structure into the close.  Let’s look at the intraday 5-minute structure and the sneaky Elliott Wave pattern that formed into the close.

Let’s use the DIA – Dow Jones ETF – for a trading proxy:

5-minute chart showing the busted “Trend Day” structure:

Up until 3:00pm, Monday’s action was a classic example of a “Trend Day” trading tactic environment.  We opened with a large gap with nary an attempt to fill it, quickly made new lows on the day, and subsequent rallies to the falling 20 period EMA all failed, offering opportune short-selling entries (with a stop-loss just beyond the average).  The down-trend structure was also confirmed by the falling 50 period EMA.

It was a day to trade aggressively short – if you had the stomach for it.  However, as has been written by TraderMike and many others, short-selling in a bear market isn’t as easy as you think.  It’s not as easy as “throw a dart, get short, rake in profits.”  Notice that the end-of-day rally didn’t hold resistance at either the 20 or 50 period EMA, and in fact, virtually erased all gains if you got short at any point in the day and held until the close.

A positive momentum divergence preceded the late-day surge, and with conditions so oversold, it certainly shouldn’t have been entirely unexpected, but the rally was quick, unrelenting (to shorts), and persistent, rallying roughly $4.00 (400 Dow Points) before the closing bell sounded.

On an educational note (including higher/lower time frames), the 10:30 rally into the falling 20 period EMA – setting up a powerful short-sell entry – was actually a complete Elliott Wave pattern I pointed out this morning in my “One Minute Elliott Wave Example” post this morning.

The final rally was also a five-wave Elliott Pattern, where the first, third, and fifth waves all contained fractal impulse 5-wave patterns as well – it’s clearly worth examining from an educational (example) standpoint.

1-minute chart showing Elliott Fractal Wave into the Close:

Elliott Wave is fractal, and ‘waves within waves’ are often labeled with Roman numerals (as well as parentheses or circles – not used in this example by me).  The larger Arabic numerals (1-5) represent the large-scale Elliott Impulse while each of the 1, 3, and 5 Waves are subdivided with Roman (i – v) numerals.

Notice that in both sub-wave 5 (of Wave 3) and sub-wave 5 (of Wave 5) both ended with negative momentum divergences.  I’m finding higher probability plays when I identify potential Elliott 5-Wave completed patterns that form negative momentum divergences – there’s higher probabilty than just saying “Oh, look – a negative divergence” when you apply a perceived (potential) Elliott Wave count.

Also, sub-waves ii and iv (of Wave 3) found support at the rising 20 period EMA.  Again, applying a potential Elliott count may grant higher probability than simply saying “it’s a pull-back to a moving average” as I’m so accustomed to doing – it’s taking time for me to incorporate Elliott but I’m finding it fascinating and an excellent complement to the work and trading I’m doing already.

Even though this Wave pattern is drawn on the 1-minute chart (I don’t recommend trading this time-frame), notice that the impulse crossed a large price territory, from roughly $95.25 up to $100.25 (a $5.00 swing) in just over an hour – folks, that’s remarkable.

Today’s trading activity will yet again go down in the history books.  At one point, the Dow Jones was down 800 points in a single day.  The VIX (Volatility Index) made new highs at index value 58.24.  Many stocks made new lows.

Stay very safe in this environment – it’s not the place for quick wealth generation.  More fortunes are being destroyed in this environment than are being created.  Use extreme caution and continue to make capital preservation your #1 goal.

I know – probably the last thing you want to read on a day when the US Equity Indexes are down over 5% is an example of the Elliott Wave Theory applied to a one-minute chart of the DIA, but sometimes it helps to envision structure in an environment of perceived chaos and randomness.  If anything, we can use it as an educational example of applying Elliott to all time frames.  Let’s see it in action.

Recall back to my previous post on the “Three Hard Rules of Elliott Wave Theory.”  Let’s see it on the 1-minute chart of today’s (October 6th, 2008) DIA chart:

Elliott Wave Theory is fractal, meaning the structure (5-wave move) can be observed and applied to all timeframes – even the one-minute chart.

Price makes the first wave into the 20 period EMA resistance just before 11:00am.  The resistance holds but price makes a higher low and then breaks above the EMA, signaling strength.  Momentum makes a new high and price rockets through the 50 period EMA resistance.  The structure is actually a counter-trend wave up against a pervasive downtrend day which began with a large gap.

Price then finds support as it retests EMA support but forms a momentum divergence and fails soon after.

Was there a clearer structure that could have given more clues about price’s probable (or possible) short-term swings ahead?  Now, of course, on this short of time frame, it is extremely difficult to implement trading strategies, but keep in mind that some professional traders utilize tick charts, which can even require faster trading tactics than the 1-minute chart – and I scarcely ever recommend trading off the 1-minute chart.  The 5-minute chart is ‘as low as I’ll go” usually.

There was actually a complete, picture-perfect Elliott Wave full cycle example, complete with the “ABC” Corrective Wave following the standard 5-wave impulse.  I’ve labeled it for you in the above chart, and simplified the full wave motion in a diagram below:

In today’s example, Wave 3 was an extended wave which actually contained a Full Elliott Wave Cycle inside it – complete with the ABC Corrective Wave – I had to point out this fractal pattern for its education implications.

Also, notice that the bottom pane momentum oscillator formed a clear negative divergence as price completed the 5th Wave of the larger impulse – the odds were overwhelmingly high for a new down-swing, not only as a result of a completed Elliott 5-Wave Pattern and the Negative Momentum Divergence, but due to the larger time frame (5-minute, 15-minute, 30-minute, daily, etc) structure.  As of this writing, price is making new lows on the day after this Elliott Impulse formed and completed.

The more I apply Elliott Wave Theory, the more impressed I am with the understanding of price structure both in hindsight and in real time as I apply my current interpretation of price structure (momentum, support/resistance, etc).

Elliott is just one of the many tools to provide interpretation of price action and to establish price targets and risk-management points.

Today’s equity decline undersay has stunning ramifications for the larger time-frame structure of the S&P 500 and other US Equity Indexes – we’re now at levels not seen since 2003.  Let’s take a quick look at this structure to see where this takes us.

S&P 500 Monthly Chart:

First, let me state that we’ve now officially ‘blown through’ the long-term (large scale) Fibonacci retracements from the 2002 lows to the 2007 highs.  The sellers took out the 61.8% Fibonacci retracement at roughly 1,080 this morning.

Price is undeniably in a monthly downtrend, though the 20 and 50 month EMAs have yet to cross (the 10 and 30 month EMAs have done so – a popular combination used on longer time frame charts).

Where’s the next level of possible support?  I suggest it’s potentially the rising 200 month SMA just under 1,000.  We may get a bounce off current levels, but should price test the longer SMA, a bounce would be in order.

Ultimately, I find it highly conceivable that we retest the 750 – 800 area which  marked the early 2000’s bear market low – it looks clearer than ever now that we’re headed there at some point – but not before a few more counter-trend rallies occur.

This is not an environment for aggression on either side (long or short).  Though it may not seem so, bear markets are much more difficult to trade than bull markets.  Case in point, it took only one year to totally destroy the equity gains that were achieved in five years – let that sink in.

It’s worth noting also that the momentum oscillator registered a new monthly momentum low not seen even during the devastating early 2000’s bear market – don’t overlook this point as well.

Scale your charts back to the larger time frame to see massive technical (price) damage being done across multilpe stocks and sectors – it’s horrific out there for investors and many traders as well.

I’ll keep you informed on new developments and insights across the various markets.

The US Dollar Index made fresh 2008 highs on Friday, but only marginally so.  Let’s look at the daily chart as well as the longer term monthly chart for potential clues to the future.

Also, Adam Hewison of Market Club recently released a two-part video series entitled “The Past and Present of the US Dollar Index – What’s Ahead?“  It’s worth viewing as Adam walks us through the longer-term charts down to the present.

US Dollar Index Daily Chart:

Price formed a new high marginally just shy of index level $81.00.  There’s a potential bearish development, in that price has formed a doji candle pattern at the upper channel of the Bollinger Bands – other oscillators (such as Stochastics and RSI) are showing “overbought” readings.  It’s probably not the best time to be short-term bullish on the Dollar as a result, as price has cleanly made a sharp run up, despite bearish sentiment out there.

Momentum made a marginal new high which is roughly equivalent to the previous oscillator peak in early August.  A negative divergence formed into September prior to the large down-swing (retracement) which took price to the exact 50.0% Fibonacci retracement of the move from July to early September.

Let’s pull the view way back to the Monthly charts.

US Dollar Index Monthly Chart:

We can see two good example of triple-swing momentum divergences, first to the downside in early the early 2000s and then to the upside from 2003 to 2005.

Momentum is making a long-term divergence from the 2003/2005 lows to the current price lows – notice how momentum is making a clearly higher low as price made new lows into 2008.

Price has broken above the 20 month EMA and could find resistance via the falling 50 month EMA just above $82.50 – we’ll need to watch this area closely as price tests these levels.

Continue to watch the US Dollar Index closely, and apply your own analysis to your research for more insights.