Taking Prudent Approach: Exiting Potash

Investing is never easy. Even if we apply thorough, well-reasoned analysis, the possibility exists that the markets will invalidate our thesis and move against us. Knowing this, we are pleased when our approach delivers a trade that acts as expected and yields substantial rewards. An example is the short of Potash (POT) first recommended in my weekly newsletter

As I detailed in an article on Seeking Alpha last week, the initial trade occurred when POT was trading close to a long-standing resistance level, thus offering limited risk but immense upside potential.

A principle I have often discussed is that when an important technical price point falls, dramatic movement occurs. This belief allowed us to exit First Solar (FSLR) prior to a large sell-off and will enable us to determine a price target for POT.

With POT moving below the 50-day moving average, prices have cascaded lower. As there is no discernible support, we can expect the shares to retest their lows ($49.60) in the coming weeks. Having already seen a 28% return on this position, the ultimate collapse would yield substantial gains. If we were investing in a vacuum, the clear decision would be to allow POT to continue sinking and squeeze every dime of gains from this position.

However, we do not exist in a vacuum. I have often stated that we are in a range-bound traders' market where quickly realizing gains will allow us to accumulate outsized returns. With the market oversold and in need of a rally, I will not allow hard-fought gains to be surrendered as we attempt to squeeze every penny from this trade. Instead, I recommend a prudent approach that will allow us to benefit from a further drop in POT while also moving money off the table. To satisfy this dual mandate, I recommend closing 50% of the short POT position as this week's technical trade
..Sean Hannon in seeking alpha