Daily Form July 31, 2007

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TUESDAY JULY 31, 2007       06:23 ET

The markets found some degree of stability yesterday after an erratic start to the session. The S&P 500 (^SPC) came very close to tagging its 200 day EMA and also found some nominal support from the pre Feb 27th resistance high that may have provided a "psychological" support level for traders yesterday after the battering that the indices took last week.


The Dow Jones Utilities (^DJU) have been trading in a very technically precise manner recently. The index rallied back to the 520 level as would be expected from chart and has now bounced off the previous March low levels.

The S&P Midcap index (^MID) also performed a technically precise testing of its 200 day EMA in yesterday’s session.

In yesterday’s commentary I looked at the FTSE index and discussed the relative underperformance in recent weeks as contrasted with the S&P 500. Also worth attention is the action in the Nikkei 225 which has clearly fallen out of the ascending channel off the March lows and came to rest in Tuesday’s trading almost exactly at the 200 day EMA level. Notably this index has so far failed to regain its position above the February peaks.

I am also watching the Japanese yen closely as important cross rates against sterling and the Australian and New Zealand dollars can provide some clues as to the actions of hedge funds with respect to the carry trade. The 118 level on the dollar/yen is an important threshold level that may be tested in coming sessions.

TRADE OPPORTUNITIES/SETUPS FOR TUESDAY JULY 31, 2007



The patterns identified below should be considered as indicative of eventual price direction in forthcoming trading sessions. None of these setups should be seen as specifically opportune for the current trading session.
For full details on time horizons, risk management and hedging techniques please visit http://www.tradewithform.com

GS  The Goldman Sachs Group Inc.  

As expected many of the financial stocks found some stability in yesterday’s trading with a couple of notable bounces, including Wells Fargo (WFC) which moved up more than 3%. Goldman Sachs (GS) also appears to have reached some stability near to its March lows.



PAYX  Paychex Inc.  

Paychex (PAYX) has a constructive looking flag formation



MRK  Merck and Co. Inc.  

Merck (MRK) reveals a long lower shadow or tail at a key intersection of moving averages and may be ready to move higher as long as the overall market remains relatively stable.



BRL  Barr Pharmaceuticals Inc.  

A somewhat similar pattern to Merck is to be found on the chart for Barr Pharmaceuticals (BRL).



CHKP  Check Point Software Technologies Ltd.  

Checkpoint (CKP) looks favorable on the long side and an entry near to the $24 level could present a chance to benefit from renewed buying interest following last week’s strong upwards gap move on heavy volume.

Daily Form July 30, 2007

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MONDAY JULY 30, 2007       05:47 ET

The indices eroded further in Friday’s session as traders and fund managers struggle to understand the severity of the tumltuous conditions in the credit markets. The S&P 500 (^SPC) came to rest very close to the level that it had attained immediately prior to the first sub-prime induced sell off that began on February 27th. The 200 day EMA lies just below this and may provide some further reason for buyers to step forward to arrest the decline.

Just how much further down we will go from here depends on one of the features of the current malaise in the credit markets that is not really being addressed by the mainstream media which are using more traditional notions like "credit crunch" and "re-pricing of risk".

Far more troubling is the complexity and opacity in the pricing mechanism of the collateralized debt obligation instruments that underlie not only the mortgage market but most of the leveraged finance used by most institutions including hedge funds and private equity groups.

Illiquidity and opacity can be an advantage to holders of these asset as this usually means that these derivatives are marked to the model rather than as in the case of most assets, marked to the market. The problem that holders are now facing is that, when some sub-prime portfolios are effectively being written off as worthless, there is growing anxiety that the way these instruments work may not have been fully comprehended and sanity tested by the engineers that devised them. Markets do not perform the same way under stress that they do under "normal" circumstances and standard probability assumptions which are the bedrock of much risk assessment and quantification are no longer appropriate.


I shall be most keen today to watch the performance of the banking index. Just for the record I thought it would be good to look at a longer term chart for the sector which focuses on the weekly closes of the index since the beginning of the bull market that emerged following the second Gulf War in March 2003. As can be seen the trend line through the lows was broken recently (one of the very few indices to reveal such a breach) and the index is now headed towards a critical test at the 105 level.

This key level was tagged in Friday’s trading and this marks the level of the 200 week EMA as well as a key area of previous support/resistance that extends back to 2004. We may well find out in the next few sessions whether the rumors of hedge fund collapses and abandonment of some large previously announced acquisitions have substance. If there are big surprises to come in the world of collateralized debt obligations (CDO’s), the banking sector could lead the way in bringing the whole market much lower. An alternative scenario is that we will see a week of whipsaws and much enhanced intraday volatility but no great shocks. If stocks like JP Morgan (JPM), Lehman Brothers (LEH), Bear Stearns (BSC), Wells Fargo (WFC) and Bank of America (BAC) do not find support near to where they closed on Friday we should expect that any respite in the selling is a temporary reprieve.

Much of the focus at present will be on the US markets which are perhaps most vulnerable to disruptions in the smooth functioning of the credit markets. The bid premium which has arisen in equities has been most prominent in the US market but the UK market has also seen more than its fair share of private equity financed acquisitions.

The FTSE has suffered more, in recent days, on a relative basis than the S&P 500 and the index failed to find support at the comparable level (i.e. the pre February 27th level) that is still intact on the S&P 500. Interestingly taking March 2003 as a base line index for both the US and UK index they both finished on Friday at almost identical levels. But this was after some notable outperformance by the FTSE during much of 2005 and 2006.

The following chart (apologies for the lack of color clarity) shows how all three indices that we have looked at today have performed since March 2003. By rebasing each index itself in terms of a common index of 100 for that base period it is possible to highlight their relative strengths and performance. Apparent is the re-convergence of the FTSE and the S&P 500 after the UK index outperformed over much of the last year and one half. Also very clearly revealed is the notable underperformance of the US banking sector during 2007 and the chart provides another perspective on the broken trend line for this index that I alluded to above.

This is one of the charts that I shall be discussing further today when I shall be a guest analyst on CNBC’s European Closing Bell around 16.20 (London time).

TRADE OPPORTUNITIES/SETUPS FOR MONDAY JULY 30, 2007



The patterns identified below should be considered as indicative of eventual price direction in forthcoming trading sessions. None of these setups should be seen as specifically opportune for the current trading session.
For full details on time horizons, risk management and hedging techniques please visit http://www.tradewithform.com

GS  The Goldman Sachs Group Inc.  

Goldman Sachs (GS) dropped straight through any potential support at the 200 day EMA level but in Friday’s action the inside day that was registered leads some plausibility to the view that the stock will find some support at the previous lows for the year seen in early March.



WFC  Wells Fargo and Company  

As I discussed in Friday’s commentary the action in the mainstream banks has been even more troubled than for the investment banks. Wells Fargo (WFC) with exposure to real estate woes as well as broad participation in the securitization markets has also come down to a level where I shall be watching today for some kind of buying support to arrest the recent decline.



PFG  Principal Financial Group  

There are so many charts in the financial services area that tell their own story of a breakdown in constructive dynamics. Principal Financial Group (PFG) suffered steep losses last week and it is not easily discernible where support might arise on this long term chart.



HSY  Hershey Foods Corporation  

Hershey (HSY) broke below its 200 week EMA in Friday’s trading.



ULBI  Ultralife Batteries Inc.  

One of the only stocks that I would consider on the long side is for Ultralife Batteries (ULBI) which looks constructive on both the weekly and daily charts.

Daily Form July 27, 2007

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FRIDAY JULY 27, 2007       06:46 ET

Looking through the charts this morning there are so many that deserve attention. In Wednesday’s column we looked at several that had violated key trend lines and following yesterday’s panic selling the ones that had avoided breaching critical levels have now joined the fray. The Nasdaq Composite (^IXIC) had held up better than the other indices until yesterday. As can be seen the index in just one session has now closed definitively below its upward trendline since March and the 50 day EMA.

One of the very few charts that is still not in this category is for the subset of the 100 largest companies in the Nasdaq (^NDX).

The main focus in the markets at the moment is the health of the financial economy and the possibility that many banks and financial institutions may be exposed to far more risk in their holdings of securitized assets than they thought (or understand!). Whether the big tech names can offer a safe harbour for fund managers that are drastically re-allocating their funds away from the more financially exposed sectors is one of many enigmas in the current market environment.


As often commented on before the Russell 2000 (^RUT) has been in the vanguard of the indicators that pointed to the impending weakness for the broader market. The break below 820 earlier in the week clearly revealed the rupturing of the bullish dynamics that had enabled the market to recover so nimbly from the late February sell-off.

Yesterday’s continuation of Tuesday’s downthrust brought the index through the 200 day EMA without any evidence of support. Some kind of bounce may well appear in today’s session but if the avalanche resumes perhaps the March lows near 760 will become the next level where buyers should be expected to appear.

One of the more remarkable changes that has been happening somewhat below the radar screen because of the turbulence in the equity market environment is the way that the Treasury market has pulled back from the peak in yields in early June. After peeking above 5.3% on June 13th the yield on the ten year note has now retreated by more than 50 basis points.

Yesterday’s surge in bond prices had a lot to do with a "flight to safety" and that may propel yields even lower but at some point Treasury traders will have return to the other factors that could be less benign for declining yields such a the continuing move up in the price of crude and the diversification posture of foreign governments towards becoming too exposed to dollar denominated assets.

One of the reasons why I focus so often on the ^XBD index (the broker/dealer index) is that it provides an insight into the financial economy. More than ever the global equity markets are best gauged by the underlying health of the financial system - the appetite for risk as expressed in credit spreads, the liquidity in the derivatives markets and the vitality of the hedge fund and private equity businesses. The investment banks have been suffering more than most during the recent turmoil and many of them have headed back towards their lows that were experienced during the last major episode of financial contagion in May/June of 2006.

Earlier in the week I showed a monthly chart of the mainstream banking sector ^BKX which even then was showing a clear breach of the uptrend through the lows since March 2003. (Yesterday’s market downthrust ratcheted the ^BKX down another, rather extraordinary, 5.6%).

At present the investment banking sector is not in a similar position of breaking below the trend since 2003 but, as the chart below reveals, the index has for the first time in four years come down to and appears to be likely to break below the 20 month EMA.

I cannot make up my mind whether to take some consolation in this fact as the investment banks, that are further up the value chain as innovators of the complex financial engineering products that have become ubiquitous in the financial economy, should perhaps be more exposed to derivatives than the mainstream banks. But on the other hand the money center banks are more connected to the Main Street economy and their current plight is perhaps more ominous in exposing the extent to which the whole economy is vulnerable to the fallout from synthetic loan blow ups and further unwinding of the carry trade etc.

TRADE OPPORTUNITIES/SETUPS FOR FRIDAY JULY 27, 2007



The patterns identified below should be considered as indicative of eventual price direction in forthcoming trading sessions. None of these setups should be seen as specifically opportune for the current trading session.
For full details on time horizons, risk management and hedging techniques please visit http://www.tradewithform.com

XLF    

The financial services sector fund (XLF) would have provided one of the best vehicles for playing the short side over the last few weeks as the banks and financial services sector has seen a mass exodus.

It is probably time to take profit if you have been smart enough to be on the short side since the series of lower highs were a classic sell signal. The short covering and inevitable bargain hunting that will be much trumpeted by some analysts and brokers in coming weeks should be seen as providing a good opportunity to re-establish short positions towards the end of the summer/early fall.



SONS  Sonus Networks Inc.  

A week ago I suggested that Sonus (SONS) looked good on the short side as the descending wedge formation appeared close to a breakdown. Even in the context of yesterday’s major sell-off the 16.5% drop would have provided a very nice return.



XLY  SPDR Consumer Discretionary Sector  

The continuing erosion of real estate values is going to affect the health of the consumer sector and the drops in XLY, the consumer discretionary sector fund are a further reminder of the true interface between the financial economy and the real economy - the purchasing power (nowadays largely influenced by the availability of credit and the ability to "release" home equity) and confidence of the consumer sector.



LEH  Lehman Brothers Holdings Inc.  

Amongst the investment banks, several are approaching the lows that extend back to the summer of 2006. Lehman Brothers (LEH), Bear Stearns (BSC) and Merrill Lynch (MER) are all candidates for a bounce at this level. Goldman Sachs (GS), as is often the case, is showing relative strength and may not need to revisit the equivalent level before it finds some support.

If the banks in general and the investment banks in particular don’t bounce soon the Fed will have to polish off its market rescue manuals and rehearse all of those speeches about the strength of the underlying market fundamentals etc.

Daily Form July 26, 2007

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THURSDAY JULY 26, 2007       07:13 ET

The Nasdaq Composite (^IXIC) has held up better than the other indices during the recent turmoil. Not only has the index managed to avoid any violation of its upward trend line since March but it has yet to test the 50 day EMA.

There is little doubt that technology shares have been the principal beneficiaries following the exodus from the more financially oriented sectors. While asset managers continue to support the high tech names, bullish sentiments may rescue the market from the more gloomy view emanating from the mortgage sector and, increasingly, the deteriorating environment for financing mergers and acquisitions.

Sustained momentum in the Nasdaq could frustrate the growing numbers of index put buyers and lead to another major short squeeze.


The Russell 2000 (^RUT moved down to tag the 200 day EMA in yesterday’s session but still failed to close above the opening price.

Unlike many Asian indices which have barely flinched during the recent turbulence in the US market, the UK’s FTSE index has been facing its own struggles during recent sessions. As this is being written the index is trading in the vicinity of 6430 which as can be seen on the chart represents an area where some chart support is to be expected.

There are some similarities in the technical characteristics between this UK index and the Russell 2000 above, but unlike the small cap US index the FTSE is still above the late February highs but only just.

TRADE OPPORTUNITIES/SETUPS FOR THURSDAY JULY 26, 2007



The patterns identified below should be considered as indicative of eventual price direction in forthcoming trading sessions. None of these setups should be seen as specifically opportune for the current trading session.
For full details on time horizons, risk management and hedging techniques please visit http://www.tradewithform.com

GLW  Corning Incorporated  

The breakdown in the chart for Corning (GLW) suggests that further erosion towards the 200 day EMA at least is to be expected.



AXL  American Axle and Manufacturing Holdings Inc.  

The chart for American Axle (AXL) illustrates how easily a break of a key trend line can turn into an avalanche.



AMLN  Amylin Pharmaceuticals  

Amilyn (AMLN) powered ahead in yesterday’s session and broke above the recent trading high. The upward momentum may continue uanabated but a slight pullback or consolidation at this stage would probably provide an opportunity for latecomers to enjoy further gains.

Daily Form July 25, 2007

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WEDNESDAY JULY 25, 2007       07:15 ET

Today’s commentary will focus on some major trendline violations that occurred during yesterday’s aggressive sell-off. Selling was most acute in the mortgage related financial services and investment banks but several other high fliers came under the hammer including Apple which dropped more than six percent.

The Russell 2000 (^RUT) came down almost three percent and violated two lines of support.

I would construe this action as the interruption of the major bullish trend that has been in place since the early March recovery. Having said that I am hesitant to write any obituaries for the longer term bullish scenario since the market has proven itself remarkably resilient especially when the bears have become too enthusiastic. However if the short squeezes are not accompanied by genuine new accumulation by fund managers the warning signals that were set off by yesterday’s notable under performance by the small cap index should be taken as notice that the market appears to be in a phase transition to intermediate bearishness that may not find its full expression until the fall.


The monthly chart for the banking index (^BKX) below is more troubling as it shows that as of yesterday’s close the index has violated the long term trendline through the lows that extends all the way back to the bull move that began in the spring of 2003.

The S&P 500 (^SPC) fell by two percent in yesterday’s trading which makes it the largest one day decline since the three percent plus decline on February 27th which was when the market became preoccupied with the concerns from the sub-prime mortgage sector and credit derivatives.

As can be seen from the daily chart the 50 day EMA was decisively crossed and the upward trendline since the March recovery appears to have been transgressed. As previously commented I would not be surprised to see a dramatic recovery in coming sessions but in the longer term the market will need more than short squeezes to sustain the underlying constructive dynamics for long only fund managers.

TRADE OPPORTUNITIES/SETUPS FOR WEDNESDAY JULY 25, 2007



The patterns identified below should be considered as indicative of eventual price direction in forthcoming trading sessions. None of these setups should be seen as specifically opportune for the current trading session.
For full details on time horizons, risk management and hedging techniques please visit http://www.tradewithform.com

LEH  Lehman Brothers Holdings Inc.  

Lehman Brothers (LEH) has been acting poorly for several weeks and after registering a new 2007 low in Monday’s trading the stock lost a further 3.6% yesterday. It was another rough session for the investment banks as anxiety about the integrity of certain areas of the mortgage related derivatives markets refuse to go away. Pricing of some of these complex instruments that have been devised by financial engineers is becoming a contentious issue

Illiquidity and opacity can be an advantage to hedge funds and banks that are holding these asset as a lack of a transparent pricing mechanism for them often means that these derivatives are marked to the model rather than as in the case of most assets, marked to the market. But when some sub-prime portfolios are effectively being written off as worthless there is growing anxiety that there may be more emperors wearing no clothes than asset managers are likely to feel comfortable about.



BAC  Bank of America Corporation  

Another graphical depiction of a trend violation is apparent in the weekly chart for Bank Of America (BAC) which shows in more vivid detail than the daily chart the unhealthy congestion that has been forming since March and which partially concealed the distribution within the banking sector that I alluded to in yesterday’s commentary.



BZH  Beazer Homes Inc.  

One more chart, in this case more of an individual story but still related to a sector that is in the midst of a major distribution, relates to Beazer Homes (BZH). The weekly chart shows the period back to the spring of 2003 and highlights the roller coaster ride that an "investor" whould have taken with the stock. The ride took the price above $80 in late 2005/early 2006 and has now returned to earth and actually below where it stood four years ago.



AMCC  Applied Micro Circuits Corporation  

Selecting individual stock setups within the current environment is more problematic than usual and I would suggest that a cautious approach be followed until the markets have come to terms with the anxiety over credit derivatives (which may not be any time soon).

Applied Micro Circuits (AMCC) avoided yesterday’s selling and the chart pattern looks as though the stock is preparing for a possible hurdle above the 200 day EMA.



BHI  Baker Hughes Incorporated  

In the oil services sector Baker Hughes (BHI) has a chart pattern which suggests that the sellers may be waiting for an entry close to $85 for another assault on the stock.

Daily Form July 24, 2007

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TUESDAY JULY 24, 2007       07:30 ET

Following Friday’s sell-off on above average volume, somewhat surprisingly there was no follow through on the open yesterday as one might have expected. The market decided to focus on the announcement of new deals and mergers and set off on a move higher. The momentum behind the rally however began to dissipate later in the session and the indices closed below their highs for the session. The S&P 500 (^SPC), like many of the indices, registered an inside session.


The chart for the banking index (^BKX) indicates several recent attempts to rally from downthrusts that have failed. This is a pattern that suggests that the sector is undergoing distribution within the context of some powerful short squeezes. The move down to the lows from March should now provide a real test for the index and an opportunity to see whether bargain hunters can change the underlying weak dynamics.

Gold will soon face a challenge as it returns to the highs from April.

TRADE OPPORTUNITIES/SETUPS FOR TUESDAY JULY 24, 2007



The patterns identified below should be considered as indicative of eventual price direction in forthcoming trading sessions. None of these setups should be seen as specifically opportune for the current trading session.
For full details on time horizons, risk management and hedging techniques please visit http://www.tradewithform.com

HAS  Hasbro Inc.  

The way that the market interprets earnings announcements can sometimes be quite instructive in relation to the chart formations. Last week I noted that Hasbro (HAS) was coming towards a critical threshold in an upward wedge formation and could be preparing for a break above its recent ceiling in coming sessions. As can be seen from the chart the stock gapped upwards on the open yesterday in apparent celebration of the announcement yesterday but the open for the day was more or less the day’s high and the stock sold off rather aggressively as greater scrutiny of the company’s earnings report and outlook failed to match expectations.



CAL  Continental Airlines Inc.  

Another example of the potential pitfalls of chart formations during earnings season relates to Continental Airlines (CAL) which appeared to have a bull flag developing last week. The earnings were initially welcomed by the market but on closer inspection the mood turned less favorable and led to the long red candlestick in last Thursday’s trading.

As with Hasbro the initial reaction to the report could have been surmised from the chart formation, which explains the initial opening gap surges in both cases, but the quality of the earnings for CAL as for HAS failed to match the elevated expectations and those that were initially enthused by the announcements were faded quite aggressively.

Daily Form July 23, 2007

TRADE WITH FORM
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Trade successfully without having to be right about the underlying market direction
MONDAY JULY 23, 2007       05:52 ET

Friday’s sell-off brought the Russell 2000 (^RUT) to a close just below thte 50 day EMA but as the chart below reveals the upward trendline is still intact. If the pattern of short squeezes, that have become a characteristic when the market reaches down to pivotal levels. is to repeat itself we should see another rally emerging as the week moves forward. But this may have to wait until a little more anxiety has been injected into proceedings to embolden a few more bears.

I would, however, become less sanguine about relying on such short squeezes if this index closes convincingly below 820.


Several banks and financial stocks were hit hard on Friday and the financial services sector fund XLF which was discussed here on Friday seems destined to restest the March low around $32. Unravelling the factors that are causing unease about the prospects for the sector there are several that are looming on the hrizon, and perhaps the most opque are questions about the quality and liquidity of CDO’s and other derivatives that underpin the mortgage market.

On the other hand the picture for long term interest rates looks better now than it did in June. Further strength in Treasury prices with the consequent decline in yields would bring about a re-assessment of the sustainability of the recent breakout above five percent.

The broker/dealer sector index (^XBD) broke out of the well defined channel that I discussed on Friday and several of the investment banks registered new lows for the year in Friday’s session. As with some of the constituents such as Goldman Sachs (GS) which is discussed below the index is approaching its 200 day EMA where support is to be expected.

TRADE OPPORTUNITIES/SETUPS FOR MONDAY JULY 23, 2007



The patterns identified below should be considered as indicative of eventual price direction in forthcoming trading sessions. None of these setups should be seen as specifically opportune for the current trading session.
For full details on time horizons, risk management and hedging techniques please visit http://www.tradewithform.com

SO  The Southern Company  

As discussed on Friday Southern ran into resistance at the intersection of the moving averages. It would be worth keeping the utilities on the radar this week as the decline in Treasury yields could bring out bargain hunters that take the view that the sector has been unduly punished by the June spike in long term rates. The sector should be immune to the other concerns that are of more concern to the purely financial sector.



GS  The Goldman Sachs Group Inc.  

Goldman Sachs (GS) broke below a trend line on Friday but is now approaching a level near $205 where chart support and the 200 day EMA should provide some support. The real test may come later after the quality of a rally at this stage may provide some clues as to the severity or otherwise of the liquidity concerns regarding certain credit derivatives.



LEH  Lehman Brothers Holdings Inc.  

The chart for Lehman Brothers (LEH) looks less resilient than Goldman and on Friday a new one year low was registered. If the short sellers that have been attracted to the sector are rattled and squeezed in coming sessions Lehman can be expected to mount an abrupt and powerful rally.



WAG  Walgreen Company  

Walgreen (WAG) has a bullish looking wedge pattern and evidence of accumulation. The strength shown in Friday’s broad based sell-off suggests that the stock has relative strength and upward momentum.