Trader’s Narrative

I was watching Research In Motion (RIMM) because it had recently gapped up. But since it trades at the same time on both US and Canadian stock exchanges, I also compared the US and Canadian charts (technically RIM also trades on other exchanges but they are in different timezones). In any case, here’s the US version:

And here’s the Canadian version:

The contrast between the two is obvious. Sure, there are a lot of gaps in RIM’s chart but the ugliest one occurred in late September 2008 and represents some serious resistance.

In the Canadian version of the chart, the current price had already bumped its head against this resistance. But in the US version of the chart, that resistance was still a few notches higher. Considering this much resistance so close, as well as the fact that prices had gapped up recently and we were probably looking at an exhaustion gap, and finally, considering that the market in general is heavy as I’ve outlined before, my conclusion was to watch for a decline if RIM broke $60.

Although I was expecting price to breakdown, it actually went up. That’s the really interesting thing here. Today RIMM gapped up (again), easily piercing the ~$65 resistance that had held it in a plateau for the past few trading sessions. Price was not only rocketing higher, it was being fueled by a massive amount of volume:

There was a textbook intra-day pattern: thrust through resistance, shallow pullback, hammer candlestick and lift-off!

So what’s the lesson? At first I thought it was to have more than one plan going into the day. But then you can’t really prepare yourself for every single contingency can you? For me, this is a lesson in humility and detachment. A great opportunity to practice both mental and emotional flexibility. When you’re wrong, you’re wrong. Don’t argue with the chart. Instead, let it be your guide. And do your best to keep up.

Interesting & Irrelevant Factoid: I remember a short presentation that the founder of RIM gave to my university class when they were still in their “garage” stage of development. My prof knew Lazaridis and he thought RIM’s product (in alpha stage back then) was so cool that it should be introduced to its eventual users. To be honest with you, I wasn’t too impressed, probably because I didn’t understand half the presentation. Not too long ago, while in town again to visit my Mom, I bumped into Lazaridis at a local book store. He’s a really nice guy, a family man, very down to earth.

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Yes, this is about #2. At least the chemical equivalent. So let’s get the jokes out of the way first…

Whenever one stock grows enough to represent an inordinately large percentage of the index it belongs to, you know there is some major dislocation going on. And it is about to be corrected.

Right now that would be Potash (POT) the fertilizer company from Saskatchewan, Canada. Potash is now the 2nd largest company on the Toronto Stock Exchange, at $60 billion capitalization. The largest is RIM (RIMM), which along with Potash has been the engine that has propelled the Canadian indexes higher in 2007 and so far in 2008, almost unassailable.

From the bottom of the bear market in early 2003 to recent times, Potash stock has given the lucky few to have ridden it loyally higher, a “20 bagger”:

The problem is that right now it is priced for utter perfection. And if the world is one thing, it is imperfect. For one, there is no reasonable logic to its valuation. We have more than ample reserves of yet to be mined. In fact, according to the International Fertilizer Association (who should know) at the current rate of use, we have enough proven reserves to last us another 300 years.

And strangely enough, inflation adjusted potash prices have continuously and consistently fallen over time. It is only in 2007 that we’ve seen an exception to this with KCI (potassium chloride) prices tripling. This is a response to a similar rise in the price of sulfur and natural gas (raw materials) for potash.

To bring back some perspective to this, consider a research note from Merrill Lynch saying that if we add the capitalization of the 3 large fertilizer companies: Potash, Mosaic (MOS) and Agrium (AGU) we have a value larger than the sum of the value of all potash ever mined and sold in modern history!

During the tech bubble of 2000 many Canadians remember how the TSX index was pulled higher by Nortel (NT) to levels it wouldn’t have attained by its own accord. But Potash’s (POT) meteoric rise makes Nortel’s look pathetic in comparison.

If you were lucky enough (or smart enough) to buy Nortel at the 1998 October bottom - around $75/share - and repeat the miracle of perfect timing again to sell at the top: August 2000 at around $830/share, you would only be boasting a 10 to 11 “bagger”.

If you have been fortunate enough to be long Potash, the good times may be over. Time again to look for what most are ignoring.