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PotashCorp Gave Abundance Of Sell Signals At Its '08 Top

By 2006, the demand for fertilizer was increasing.

Farmers needed to grow more crops on less land to feed a hungry world. And in 2007, Congress would insist that ethanol be blended into gasoline. The rule meant even bigger demand for corn crops and rising prices.

It was the perfect time for PotashCorp (POT), the world's largest fertilizer maker. It broke out of a cup-with-handle base in late September 2006 and soared 623% before topping at 241.62 in June 2008.

For the investor savvy enough to hang on for the long ride, the decision to sell might be tough. Psychologically, investors who have the ability to ride a stock a long way up tend to ride it back down. But PotashCorp gave investors at least four sell signals near the top.

Look at PotashCorp on the week ended April 18, 2008. It rose 15% that week on the highest volume of the entire advance. By itself, that's not a sell signal. But look what happened the next week. The stock dropped, then retraced the advance, finishing little changed (1).

That is a subtle sign of stalling. IBD founder and Chairman William O'Neil calls the pattern railroad tracks. The two long weeks with the second one basically mirroring the first tell you that excited buyers chasing the stock higher are being confronted by sellers who are locking in big profits.

When you see railroad tracks in your stock after an extended run, it might be time to sell.

The stock then consolidated (2). It was a third-stage structure that corrected 19%. It was too deep for a flat base but lasted only five weeks — too short for a cup or cup-with-handle base.

A new high from a faulty late-stage base is a sell signal.

PotashCorp broke out June 5, but the volume that day was only 20% above average. The low volume added even more doubts.

As the stock climbed to a new high, it did so on low volume (3). (That action can be seen better on a daily chart.) It was a sign of weakness, as was the bearish price reversal that week.

After that, the stock pulled back to its 10-week line but plunged below the line in high volume (4), signaling a break of support after the long advance. That's the fourth sell signal.

Taken individually, each of these signals was subtle and easy for the investor to miss. Taken together, they sent a loud message: Sell and lock in a huge profit.