Daily Form October 29, 2007

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
MONDAY OCTOBER 29, 2007       06:26 ET

The S&P 500 (^SPC) has recovered from the violation of the trend line that I have drawn and is now poised to re-cross the extension of that line. In the current environment I would not be surprised to see another move back to the recent highs either on the back of some post easing euphoria or on any decline in the price of crude which will, such is the degree of optimism, be interpreted as profoundly bullish for the economy!

Last week I commented on the rather uneasy and nervous quality to sentiment that is being revealed on the chart patterns for the Nasdaq 100 index (NDX). Friday’s long lower tail with a close at the top of the recent range underlines the fact that there is relatively weak conviction on the short side at the moment but also, in view of the impending FOMC meeting, a hesitation to push too hard for an upward break to new multi-year highs.

Reviewing the overseas action as this is being written, the rallies in Asia and Europe - the Hang Seng was up by almost four percent, Mumbai by more or less the same percentage and at one point an almost two percent rally for the UK’s FTSE - it is hard not to escape the conclusion that asset managers see much greater risk in getting left behind and delivering sub standard returns than extending themselves too far in such elated and febrile market conditions.

This patently bullish behavior is even more remarkable in the face of increasing geo-political tensions involving Iran, the possibility of $100 crude as well as a lamentable performance by the world’s reserve currency.

The homebuilding sector fund XHB has been showing some signs of vitality again, possibly as those who have enjoyed the ride down are starting to retire short positions. The sector is poised to break above a long term downward trendline which almost coincides with the 50 day EMA. If there is decisive penetration through these levels there could be a tradable recovery rally, although I would not recommend getting too comfortable on the long side.


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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ERES  eResearch Technology Inc  

eResearch Technology (ERES) may pull back further to the 20 day EMA level close to $11.50 but the pattern suggests that it could be vulnerable to further selling pressure.

SGP  Schering-Plough Corp.  

Schering Plough (SGP) has pulled back in quite a steep channel on subdued volume and may find rejection at the intersection of two moving averages above Friday’s close.

BZH  Beazer Homes Inc.  

Beazer Homes (BZH) has one of the most positive charts amongst the homebuilders and has now cleared the 50 day EMA hurdle.

PLCM  Polycom Inc  

Polycom (PLCM) has entered a congestion pattern after several strong upward sessions. The 200 day EMA just above $30 seems like a plausible target for short term traders.

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