Daily Form October 18, 2007

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
THURSDAY OCTOBER 18, 2007       07:04 ET

Yesterday’s trading highlighted the jittery and fragile nature of current market sentiment as an early rally predicated on good earnings from several large cap stocks was followed by a quick drop as concerns rose to the fore again about a deteriorating housing situation, credit market issues, a slowing economy and an exodus by foreigners from the US capital markets.

The market recovered into the close but a common chart pattern from the day is seen in the chart for the Nasdaq 100 index (^NDX) which recorded a rather striking candlestick known as a hanging man, which is often seen near important highs when market conditions are nervous and unsettled.

As I am writing this the Bombay Sensex (^BSESN) concluded a volatile session with an almost four percent drop after yesterday’s gyrations which included a halt to trading as the index plunged on the open after a government announcement that expressed concerns about the recent boom in this market. The government calmed nerves later in the session and the index regained its composure. There is undoubtedly a bullish case to be made for Indian equities but if hedge funds lose their nerve in the near term based on adverse developments in other global assets, a pause in the appetite for emerging market securities, even if short lived, could produce a lot more disruptive trading in Mumbai.

Yields fell across the spectrum of Treasury instruments and the yield on the ten year note declined by eleven basis points. A retreat to the 4.4% level could be on the cards but traders have to weigh up their competing views regarding the evidence of a slowdown in the US economy and a more benign view of inflation with less supportive factors such as record prices for crude oil and some evidence of a global shift away from US denominated assets

The housing index (^HGX) has declined towards the lows of the year in the wake of some grim news about housing starts and a precipitous drop in home sales in southern California. The larger pattern shows a descending wedge formation which can often point to even lower prices ahead.


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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FRE  Freddie Mac  

Freddie Mac (FRE) has retreated towards the 2007 lows and close to where the stock traded in July 2006. Some institutions may be tempted to bargain hunt at or near current levels.

DLM  Del Monte Foods Company  

Del Monte Foods (DLM) has a constructive looking wedge pattern and could be emerging from a basing pattern.

APD  Air Products and Chemicals Inc.  

Air Products and Chemicals (APD) appears to be registering successively lower highs at the top of the recent range.

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