Daily Form October 23, 2007

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
TUESDAY OCTOBER 23, 2007       06:06 ET

The Nasdaq Composite (^IXIC) along with the other broad equity indices sold off in the early going yesterday and touched 2698 as its intraday low. In finding support at this level, and concluding the session with a 1.1% gain, the upward breakout above the July highs that was achieved on October 1st is still intact. The suspicion is, however, that a more robust testing of this level will be attempted in coming sessions.

The Treasury market has surrendered all of the gains in yields that pushed the ten year note to the top end of its range in June. Back then it appeared that a very long term trendline dating back almost seventeen years was about to be violated as yields pushed towards 5.25%.

Yields, across the maturity spectrum, have now retreated and the ten year note, as the weekly chart below reveals, is now tagging the 4.4% level which marks the bottom of a range that has persisted for more than two years. The growing concerns about an economic downturn suggest that the odds are increasing that this lower boundary may not hold.

The energy sector fund, XLE, reveals the kind of momentum divergences that often precede a tradable correction.


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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The homebuilding sector,as represented by the exchange traded sector fund, XHB, mounted a strong counter trend rally yesterday with several of the constituent stocks up by more than five percent. The sector may rally up towards the 50 day EMA in the near term but it is doubtful whether, given the continuing gloom and doom about the sector, it is ready for a sustained basing pattern yet.

PHM  Pulte Homes Inc.  

The risk/reward ratio on a counter trend bounce taking Pulte Homes (PHM) up towards the 50 day EMA would seem to be favorable.

WFC  Wells Fargo and Company  

Another bounce candidate that I would not be looking to make a long term commitment to is Wells Fargo (WFC) which could see a return to the 200 day EMA in the near future.

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