Daily Form September 18, 2007

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
TUESDAY SEPTEMBER 18, 2007       05:58 ET

Later this afternoon we shall find out the piece of information that traders have been focused on for the last few weeks. Ever since the asset backed commercial paper and inter-bank market seized up in early August there has been endless debate about the need for a major signal from the Federal Reserve that a credit crunch will not precipitate a significant downturn in economic activity. The ease in the discount rate by fifty basis points was seen as a partial acknowledgement of the gravity of the situation but calls for reducing the fed funds rate by a similar amount have been persistent ever since.

The markets spent most of yesterday biding their time before the announcement and there were a plethora of inside day and tiny intraday range patterns especially amongst the banks and stocks in the financial services.

The Russell 2000 (^RUT) has effectively been in suspended animation for several sessions and I shall be watching this index keenly over the next few sessions as a way of assessing the market’s perception of the implications of the Fed’s move in regard to the broader economy. As discussed on many recent occasions the index faces a formidable challenge at the 800 level and if the bulls can penetrate that level convincingly in coming days then the previous mid-July highs would appear to be back in play. While that possibility certainly cannot be ruled out there is a strong possibility that the market gets what it wants - a fifty point easing - and then has to live with the fact that the problems in the financial economy involve more complex structural issues than can be addressed with a relatively blunt instrument such as the fed funds rate.

Another index which has moved into the apex of a distinct triangular formation is for the banking sector (^BKX). As with the Russell 2000 this index faces a real hurdle at its 200 day EMA level, but as it has further to go to take on this hurdle, it also faces resistance at the 50 day EMA level in the vicinity of 108 as well.

Could it be that the market has digested all of the negatives for the homebuilding sector? The chart for the ETF for the sector, XHB, shows the relentless decline over the course of the last few months in which the sector has followed the 20 day EMA all the way down. But there are some positive divergences emerging in the MACD and MFI charts and it may be that the recognition that the FOMC is officially "worried about" a slowdown is the news that could create some buying and short covering in the sector.


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.
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HOV  Hovnanian Enterprises  

The chart for Hovnanian (HOV) echoes the comments made for the homebuilding sector in general. The stock appears to have been sold down to levels where the risk/reward ratio favors some kind of bounce.

FRX  Forest Laboratories Inc.  

The chart for Forest Labs (FRX) has characteristics of a basing pattern with a pullback from an early September attempt to rally that may have run its course.

LEH  Lehman Brothers Holdings Inc.  

Lehman Brothers (LEH) appears to have broken above the descending trendline that follows the 20 day EMA (blue line on the chart).

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