Daily Form October 4, 2007

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
THURSDAY OCTOBER 4, 2007       06:21 ET

Yesterday I commented on the abrupt intraday reversal experienced by the Hang Seng index (^HSI) where, after reaching an historic high the index reversed in the latter part of the session to close with a 2.5% decline. The decline continued in trading today with a gap down open and a further drop of 1.8%.

The chart for the Hong Kong index below is really quite extraordinary and reflects what has been happening recently in a variety of overseas markets. The move off the mid August lows took the index in almost a vertical fashion up forty percent in six weeks. This type of action inevitably will bring about quick corrections and perhaps that is all that we are witnessing in the last two sessions. But there is a lingering doubt that the current "decoupling" thesis being promulgated by lots of fund managers could be another example of a post Fed easing bubble being blown up. These bubbles often have extended lifetimes but the mania for some Asian and embryonic capital markets does seem unusually febrile at present.

I continue to be focused on the intriguing daily formations that are showing up on the chart for the Nasdaq 100 (^NDX). The risk/reward calculus for this index is beginning to look less attractive, which is only to say that the low hanging fruit in the immediate aftermath of the cut in the fed funds rate would appear to have been harvested.

In addition to the energy sector funds which are looking somewhat extended I would point again to the chart for XLP which consists of stocks from the consumer staples area which is seeing strong volume activity and which may be about to roll over.

The homebuilders have enjoyed a bit of a bounce this week for both technical reasons and as a result of positive analyst comments. However the rally has to contend soon with the 50 day EMA which the sector has not traded above since early June and a rather clear downtrend line that should provide some stiff resistance.


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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NFLX  Netflix Inc  

Netflix (NFLX) has a small bull flag formation with the appropriate volume characteristics and the pullback has managed to remain above the 200 day EMA.

INTC  Intel Corporation  

Intel (INTC) has turned round three times, over the last few months, in the vicinity of the $27 level and yesterday’s 2.2% drop on substantial volume may be pointing to the beginning of a tradable corrective period.

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