DRYS - Bull vs. Bear Struggle

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Some observations on DRYS regarding the 2007-2008 time-frame:

1. There's an old saw in Wall Street: "They don't ring bells at tops and bottoms." They're very, very difficult to catch and we usually don't recognize them until well after the fact. One of the things that we can do is to look for a "sea change," or change in character of trading. At the Bear Flag top in 2007, trading became very erratic, with wild swings to the upside and downside. That was something different, as was the technical breakdown of The Bear Flag. Prior to that breakdown, it was all bullish during the Parabolic Rally.

2. We know from many past examples that Parabolic Rallies usually end with a Parabolic return: a huge retracement to the gain, a complete retracement of the gain, or in the case of DRYS, a retracement that goes well below the origin of the Parabolic Rally, which was in the $9 area. Two and half years after the crash, DRYS stands at 4.73 and would need to rally 100% just to get back to the origin of the Parabolic Rally, which gives us an idea of how brutal Parabolics Returns can be.

3. DRYS also is a stellar example of how devastating "Doubling Down" and "Tripling Down" can be to a portfolio. There always is a rationale for doing it, like "This stock is grossly oversold," or at the November, 2008 earnings miss, "See? The stock is rallying, despite the earnings miss! That proves that all of the bad news already is factored into the stock! I'm loading up on DRYS!" The stock plummeted 87% from the release of earnings in November, 2008.

Market lesson: While we might have some success at doubling or tripling down on a losing position, it's a shame to see that strategy get rewarded because if we routinely employ that strategy, eventually, our portfolio will be loaded to the gills with stocks in which the doubling/tripling down strategy wasn't successful. And, it doesn't take very long for that to happen if we keep doubling down on losers.

Market lesson: In a Bear Market, there often are huge percentage losses at the end of the move, just when we think that "the worst is over," and that it's safe to get back into the water, as was the case with DRYS in the move down from November, 2008 earnings, and also in the move down from the Rising Channel breakdown in early 2009. DRYS fell from 13 to 2.72 on that channel breakdown.

4. At the November, 2008 earnings release, DRYS was trading at a Price/Earnings ratio of roughly 1.3 (less than 2) times Trailing Twelve Month Earnings. The rationale for buying was, "This stock is unbelievably cheap! A P/E ratio of less than 2? You have to be joking. Something is very wrong here. I'm loading up on this stock. ANYTHING is worth buying at a ridiculous P/E ratio of less than 2!"

Market lesson: If you come across a stock that is trading at a P/E of 2, or 3, or 4 and it seems totally unwarranted and the stock looks unbelievably cheap to you, run for the hills! LOL. There usually is a very good reason for that "ridiculously" low P/E, but we're not going to find out the reason until later. The market is said to be a discounting mechanism that discounts news roughly six months into the future. In July, 2009, DRYS reported earnings of $0.21, down 94% from the November, 2008 earnings of 3.53.

Oh-h-h-h...now-w you tell me!

5. At today's price of 4.73, just about all of the trading in this chart represents a huge overhang of sellers who have been trapped in the stock for nigh on three years, so we need to be mindful of that. "The farther away resistance is, the less resistance it becomes," meaning that as we move forward in time, a lot of that selling pressure gets worked off. At each year-end, for example, some players who feel hopelessly trapped at much higher prices finally capitulate and do some "tax loss selling," offsetting the loss in DRYS with a gain in another stock. That selling helps to "work off" the overhang of sellers in DRYS.

Which gets us to the near-term overhang of sellers in DRYS...




Currently we've got a Bull vs. Bear struggle in the $5+ area.

ASCENDING TRIANGLE:

DRYS broke out of an Ascending Triangle on November 9, 2010. November 17 was an earnings beat, but the candlestick was a very ominous looking Gravestone Doji, and the gap down the next session turned it into a Bearish Island Reversal: Gap up from the prior session; gap down following it.

We certainly can't blame anyone for taking profits in that situation, but after selling off and holding well above the Ascending Triangle breakout, DRYS came on strong and the 6.06 Ascending Triangle target got MADE, and was exceeded at the 6.44 high. Score one for The Bulls!

"Take profits, or at least 'some' profits when targets get MADE."

HEAD & SHOULDERS TOP:

On January 19, 2011, DRYS broke down from a H&S Top, putting a target of 3.92 IN PLAY, and that target still is IN PLAY.

FALLING CHANNEL:

Rather than just "giving it up" and letting The Bears have their H&S Top target of 3.92, The Bulls have hunkered down and have been working on a Falling Channel that, at the moment, contains a "nested" Symmetrical Triangle, with Green Data Point #4 "appearing" to have been put in last Thursday, April 14. We'll see. As we know, these things frequently "morph," so we might have to "move the chains" if DRYS takes out Thursday's low and "morphs" the pattern into a Bull Flag.

"The Tell" would be an upside takeout of 5.10 and 5.12, which would be a technical breakout of the top of The Channel, which also is a validated trendline. If that were to occur, though, we would need to curb our enthusiasm a little since the Head & Shoulders Top represents an immediate overhang of resistance, similar to what we recently witnessed with the winter overhang of sellers in FCX.