Twists Turns and Traps: Chart Updates for Potash POT

Aug 23, 2010: 12:20 PM CST

Perhaps there should be a disclaimer for traders in Potash (POT) stock:  “This stock is for Risk-seekers only.”

Why’s that?  Over the course of the last three years, Potash shares skyrocketed from $40 per share to peak at $240 per share – a 600% increase – only to plunge 80% in less than half the time (6 months to be exact) back to the $50 per share level in late 2008.

Not wanting to disappoint, share prices have now tripled to the $150 level as we turn the corner into the latter half of 2010 on take-over bids.

That rocket-ride from the $80 level to the present $150 level occurred after the stock sprung one of the most violent bear traps I can remember.

Let’s see it all as it played out and note where we are now on the larger scale.

First, Potash (POT) monthly:

Without getting too detailed on the chart, we can see the typical flat-phase that gave way to the slow rise from 2004 – 2007.

Share prices entered a period of “realization” then “euphoria” from 2007 until the June 2008 peak before the plunge back to the $50 area as 2008 came to a close.

This was at the same time Crude Oil plunged from the $147 level down to $35 per barrel – with the commodity now trading back at the $75 level.

The take-over bid sent Potash shares surging, springing a bear trap that we can see on the weekly chart that trapped a lot of shorts in a painful squeeze – painful, but the stock did give plenty of warning signals ahead of the gap surge.

Here’s the weekly frame:

I’m showing the Fibonacci Retracement grid just as a reference, though with stock-specific news such as takeovers, price can easily blow through expected resistance levels.

Price also broke through the parallel trend channel as drawn at the $135 level, and share prices are now in “open air” territory with no obvious resistance anywhere.

What’s interesting to me – and what serves as a great lesson – is how the Bear Trap developed then sprung, trapping bears in losing positions and teaching a lesson on how active trade management – not bias – is critical when trading.

Take for example the trendline and 200 day SMA break in July 2010 as price sliced under support at the $100 per share level.

That’s a classic and very high-probability short-sale trade trigger that likely led many traders to short on the breakdown of $100.  They should also place stops above the EMA confluence and price resistance at $100.  Those that did were ok – they’re not still holding short at $150 per share.

Price did breakdown to test (almost) the $80 per share level before reversing higher four weeks in a row.

Here’s the key – look where I labeled the first arrow at the $105 level when price gapped strongly above the EMA convergence at the $100 per share level.

That’s “not” supposed to happen (if you’re short).

But – it happened – so bears needed to go ahead and take a stop-loss on the position (assuming they did not already exit earlier to lock in profits.

I have a saying I repeat frequently to members of the daily reports:

“If something SHOULD happen but does NOT happen, then it often leads to a LARGER than expected move in the OPPOSITE direction.”

The upside break in Potash is one of the best examples of this concept on a large scale.

With the breakdown in support under $100, price was “supposed” to continue heading lower, at least to the $80 per share level (almost touched) and lower if under $80.

However, that did NOT happen.  Price then rallied, re-tested resistance, and then shattered above it.

To bears, this was not “supposed” to happen.

But it did.

And it led to a larger than expected upside break in the opposite direction bears were anticipating.

By the way, price steadily continued higher for the next three weeks, breaking major resistance levels on the daily chart.

On August 17th, share prices gapped up $30 from $110 per share to $140 per share on sudden news of the BHP offer to buy Potash Corp.

Bears who stubbornly held short ahead of this news were warned.  Price ‘should not’ have gone back above $100 per share but it did.

We can never know when a take-over deal – or a bit of unexpected good (or bad) news will be released that ‘shocks’ share prices.

However, charts usually send out signals ahead of such major events.  Options experts say they can pick-up on this information in the options markets.  Chartists sometimes can as well.

Charts may not tell us exactly what we should do (buy or sell) but they often tell us when risk is high (to be short) and when we might be better on the sideline.

Use this example as a lesson in how something that wasn’t ‘supposed’ to happen – did happen – which was an early “take cover!” (if short) signal weeks ahead of the huge upside gap.

Corey Rosenbloom, CMT
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1 Comment

One Response to “Twists Turns and Traps: Chart Updates for Potash POT”

  1. Shares to Buy Says:

    Those are very large changes in share price, I don't think ever I've seen such seismic changes in a stock before!