The Stock: Potash Corporation of Saskatchewan
Recent price: $126.65
Trend: The agricultural commodity sector is starting to show signs of life - even as the dead of winter is fast approaching. Fighting a cyclical downtime for stocks in the sector, the fourth quarter is hinting that there are some favourable trends emerging. A number of agriculture sector exchange-traded funds and notes have had positive turns recently as soft commodities show strength. Recent Stock Trends picks include the ELEMENTS Rogers International Commodity Agriculture ETN and the DB Agriculture Long ETN. The Powershares Global Agriculture ETF is hitting new 52-week highs, as well as the Claymore Global Agriculture ETF, listed on the Toronto Stock Exchange.
Not surprisingly, many investors are impatiently awaiting a rebirth of laggard agricultural chemical industry stocks. The global economic recovery will have to prove real, with growing demand eating up inventories and pushing up agricultural chemical prices, before a solid bullish trend unfolds. Investors may have to be patient in realizing profits, but the technical landscape for stocks in the agricultural sector is once again promising enough for buying a long-term position.
The Trade: A dominant player in the agricultural fertilizer space, Potash Corp.'s stock has long been a star performer in periods of commodity strength. However, shareholders are in a different position now as potash pricing power shifted from producers to consumers last year when China balked at escalating potash prices and pulled out of the market. The financial crisis and global recession further drove Potash Corp. shares downward. Investors are anxious to see what kind of deal China makes with producers and what price floor is established for potash. Global demand for potash is still weak and there is surplus inventory hanging overhead, but the slightest hint of an uptick in demand could make Potash Corp. - the world's largest fertilizer producer - a breakout stock in the coming months.
News that China is reportedly ready to strike a new deal for potash supplies lifted the shares of Potash Corp. and other fertilizer stocks this week, but technical signposts in the movement of Potash Corp. give investors a new window for timing entry into this long-term trade. Potash Corp. gained 10 per cent to Thursday's intra-day high at $130, bringing the share price back to its level just prior to the company announcing revised earnings guidance in the second quarter, a disappointment that brought a swift end to the stock's recovery from its low of $61.81 one year ago. Until its recent advances Potash Corp. was mired in a fairly tight trading range through the third quarter.
The stock turned Stock Trends Weak Bearish in late October when the share price cleared its 13-week moving average trend line, identifying a break through the bearish trend line resistance, but building price momentum - the stock is now outperforming the S&P/TSX composite index by 23 per cent over the last three months - is often a key signal of continued price appreciation in Potash Corp's stock.
The Upside: A move by Potash Corp. above $130 will bring it to an early test at $135, resistance marked by the stock's high in its springtime rally. Although a strong move would be unexpected at this time, clearance above $135 opens up some room for the stock to advance toward the downside gap - around $150 - that punctuated the selloff in October, 2008. Rumours of a possible takeover bid for Potash Corp. have dissipated, but a recent boosting of investment stakes by high-profile hedge fund manager George Soros have helped fuel more speculative interest in the shares.
The Downside: This trade should be a long-term hold for investors. Trend line support is currently at $105, 17 per cent below the level the shares are now trading. Impatient investors can use $110 as a more immediate stop for their trade.
Skot Kortje has been analyzing stock market trends for 15 years using trend analysis. His Stock Trends indicators have been published by The Globe and Mail since 1995. For more go to Stocktrends.ca.
Skot Kortje