January 13th, 2009

Cramer and POT

One person’s rising wedge is another person’s ascending triangle (or head-and-shoulders or double top/bottom). The reason I bring this up is because so many stocks right now have or are in the process of forming these chart patterns. In my book, the mere fact that everyone is beginning to see interesting things starting to happen only raises the question of whether the congestion of prices at these levels (whether in individual stocks or in market Indexes) are reversal or continuation patterns.

Let’s start with RSG, Republic Services, a waste management firm. According to a story in the blog 24/7 Wall St., Bill Gates keeps adding to his position in this stock:

“In an SEC filing after the close today, it was disclosed that Mr. Gates spent more than $11.6 million to buy another 460,100 shares. His new indirect position via Cascade is 37,633,936. If you look through his last holdings at the end of the last quarter (9/30), this is up from his 34,873,836 shares reported [according to Google Finance, Gates’ share would be close to 20% of the total 18.19 million shares outstanding]. The transaction date was listed as January 8, 2009 at an average price of $25.39. It seems that retired billionaires must want to be garbage men. Or maybe they just want to own the garbage companies.”

And the stock’s chart?

Does the congestion of transactions here form an ascending triangle or a wedge. More importantly, does the pattern represent a continuation or a reversal pattern or is merely the beginning of a much larger pattern. [Note: the perfect channel through October until the stock broke through the lower support trendline.]

What about Cramer doing a series on charting this week (Can you believe it? Cramer lecturing on charting. Isn’t that an oxymoron?). According to the Mad Money website, “This week Cramer will highlight the market’s top five stock charts and analyze them from a technical and fundamental perspective, giving investors the chance to see what each approach has to offer and what its limitations are.” [my emphasis added] Last night he did a riff about fertilizer stocks and said that

“POT’s attractiveness can be seen in the stock’s refusal to pull back after surging 60% between Dec. 4 and Dec. 17…(But Potash wasn’t alone. The whole fertilizer sector took a big hit.)….This means that the present shareholders are committed investors, not short-term traders, and buyers are so impatient to get this stock that they’re not waiting for it to go on sale.”

Here’s my chart on POT:

But in his usual way, Cramer dissed all the chartists who love POT and said that while interestng, it wasn’t as compelling as TNH’s chart (he threw in it was also a better stock due to TNH’s higher dividend yield than the 0.5% for POT. Cramer said:

“Terra’s climbed 12% since his Nov. 3 call, and it held up best against today’s decline of all the fertilizer names. There’s also the huge dividend yield – 15% – [actually a Cramer mistake; yield according to Google Finance is 10.8%] offering investors some defense against a still volatile market. Terra has the most exposure to corn, which requires double the fertilizer that wheat does to grow, and the company’s nitrogen-based product is much cheaper to make now that natural gas, a key ingredient, is so low.”

He still falls back on fundamentals. I’m sorry, that doesn’t sound like a very deep or insightful technical analysis of TNH’s chart. Here is my take on it:

I’m sorry, Cramer has contracted a typical novice chartist’s disease, “near-term myopia”. If he had only looked at the longer-term TNH chart he would have seen a strikingly more interesting picture.

To its credit, TNH didn’t implode with the rest of the fertilizer industry; it declined around 40% while POT (and MOS) declined around 75% each. But within the context of the Goliath horizontal channel or Head-and-Shoulder top, the puny David ascending triangle looks inconsequential. Even if the stock does break out on the top side of ascending triangle it still must contend with the overhead top resistance trendline. The real money will be made when and if it breaks that line to then move into new all-time high territory.

But the point I want to stress is the similarity in the recent action of RSG, POT and TNH (plus the majority of 5000 other stocks)? Each has had the same number of down- and up-legs in their congestion patterns. Whether they look like ascending triangles, wedges or right-shoulders, they have all been impacted by the same underlying domestic and international economic and geopolitical factors. Some have managed to cross their 60-day MAs, some are bouncing off their 90-day MAs and others have yet breach those first hurdles. These factors are encapsulated and represented in the action of the S&P 500 Index:
We can over think the whole thing (as Cramer has). Sometimes there’s isn’t always a “bull market somewhere” that Cramer’s going to be able to find. Sometimes it all boils down to the same factors driving 50% of a stock’s price that moves the market. Will these factors allow the market to hold the 2003 Tech Bubble Crash bottom or not? Only time and the beginning of a swing in investor psychology to upside momentum will tell.

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