Anatomy of how I pick the stocks (and how it played it out)

Okay guys just to give you my formula to learning when is right to start to short a security let me first give you the things I look for:

1. Trend-lines, channels, support, resistance. These are fairly straight forward and I hope that just by looking at a chart you can tell what is what.

2. Chart patterns and Volume. Chart patterns are extremely useful (such as bottom tops/bottoms, triple tops/bottoms, head and shoulders and many many others) and then their accompanying volume patterns (which are EXTREMELY important). If a trend line is broken on not very high volume you should consider that break suspect because of the low volume (for example).

3. Moving average crosses for weekly charts I use 10 week and 40 week averages (50/200 day moving average cross) which is a big lagging technical analysis long term indicator.

4. Divergences on the Moving Average Convergence/Divergence (MACD) and Relative Strength Index (RSI). The MACD will always appear at the bottom of my charts and the RSI at the top. The MACD uses 2 moving averages (for my weekly graphs they are the 12 week and 26 week) and subtracts the difference between the two and then graphs them along with a 9 day exponential moving average . Here again trend lines and cross overs are very important. The relative strength index simply takes the number (14 periods is the standard) and says this percentage of periods were up greater than 70 is overbought and less than 30 is oversold. Now with this indicator it is important to realize that just because it goes above 70 or below 30 doesn't mean you should be a contrarian immediately (as will be seen from this example).

With all of that said here is the chart:

Now the first thing it's obviously easier to look at things in hind-sight but I did want to invest in puts in POT earlier this week but unfortunately as can be seen I need to wait for a retracement. So firstly what do we see? Well we see that for the past almost 2 years there has been a very strong uptrend going from around 20 all the way up to 200! What a run up! The blue trend-line is the major trend that needs to be broken. The very interesting thing about this chart is that there is really no topping pattern at the top but that doesn't mean that there wasn't some hints that the run up was due to correct. First look at the RSI. About half of the way the RSI was almost 90 and never peaked above that. This in turn formed a negative divergence on the RSI as shown by that trend line. Now when the MACD is considered that trend line was never broken until the green vertical line. Furthermore an even better approximation of te top is where the MACD has the cross over roughly in July. Also the RSI never crossed below the 50 line (which is a line of support) until the MACD trendline and the chart trendline were broken. Finally look at the volume on this week as can be seen when this crossed through the trendline this was on a high volume day compared to the average.

So with all of this is how I came up with my notion that Potash was in for a fall. Now we get into the hard stuff which is the entry and exit points. First I need to again mention fibonnaci retracements. You take the low of the move to the high of the move and that will give you your fibonnaci levels. As can be seen the 140 fib level was a very important level as it bounced off this firmly several times and then broke through it this week on huge volume. The best shorting opportunity with the best risk reward is generally shortly after a breakout of a range/trend line. Generally the price breaks through hits support/resistance and then retraces back to test the old level. If it holds (as in this case it did as can be seen from the black circle) this is the best spot to engage in a position. For this case getting in anywhere above 160 is a good deal. The best place for a stop loss is about the 195 level or if you waited for it to test the level then come back down the the previous high (which is about 189/190).

Now for exit points well generally you should use support/resistance lines and fib levels. So here you could have either chosen the 50% fib at about 140, 61.8% at about 115 or since this move had been a 10 fold move maybe you just wanted to hold it for a long time but imo this isn't the correct play (although in hind-sight yeah it is but the odds of this play being this great are very small *although most of my picks recently have been*)

This move used with a January put option at a rough guess of 175 would have cost you about 20$ and currently the put is over 80$.. Not too bad a 4 fold profit. Also if you drew a downward trend once the trendline was broken this can also help determine entry points as shown on this daily graph:

As can be seen the downward trendline an the line of support match the spot where it is best seen to get into the position in middle september around 175.

Now with an example gone through I'll hopefully just start posting charts that I find interesting and then we can actually see how some of these play out! If you have any questions please feel free to leave a comment or get a hold of me somehow!

Jason