Daily Form November 28, 2007

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
WEDNESDAY NOVEMBER 28, 2007       06:25 ET

It was a roller coaster ride for US equity traders yesterday as the major indices zigged and zagged through another manic depressive day of trading. Lots of analysts and commentators tried to make sense of the capital injection by the Abu Dhabi sovereign wealth fund into Citigroup. Some rejoiced that Citigroup has had no trouble in raising new capital to preserve its liquidity and protect its dividend while others queried why the investment fund had to be rewarded with such generous provisions. The preferred offering included not only favorable equity conversion privileges but an 11% coupon and also protection to the fund from any dividend cut.

Just as a Saudi prince came to the rescue of Citibank in the early 90’s another group of Arab investors have now taken the largest stake in the enlarged bank/financial services conglomerate. What better way to illustrate the interdependency of major players in the global economy - petrodollars are recycled back into the largest US based banking operation and perhaps the global economy will be insulated from ever more problematic developments in the financial system.

An excellent article by Gillian Tett in today’s Financial TImes suggests that there are deep seated issues that will need to be confronted by regulators and central bankers before today’s banking system is able to comprehend and absorb all of the entanglements that are currently unravelling.

The Nasdaq Composite (^IXIC) registered an inside day with a close just at the 200 day EMA and I confess to being somewhat bemused by the current market environment. I have hardly any appetite on the long side of the market but sense that there are too many short sellers that are trying to precipitate the break below key support levels and that they will anxiously run to cover whenever there is some vaguely good news that spooks them.

A week ago I was interviewed on CNBC Europe and stressed that the 820 level on the S&P 400 Midcap index was a key support level as it represented a conjunction of key trendlines including a probable neckline for an extended head and shoulders pattern. As the chart reveals the market seems still to be "testing" this key level and while the outcome remains uncertain I shall be restrained in my own trading and be making relatively few specific suggestions in this commentary.

In Monday’s commentary I mentioned the growing divergences in the ETF for US West Texas Intermediate crude and as the chart reveals the fund gapped down yesterday and may seek out the $70 level before meaningful support kicks in.


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.
For full details on time horizons, risk management and hedging techniques please visit http://www.tradewithform.com

CMED  China Medical Technologies Inc.  

CMED which I recommended recently on the short side has delivered substantial profits since completion of the bearish pullback pattern that is highlighted on the chart.

MBI  MBIA Inc.  

If MBIA (MBI) is registering a double bottom this could be a promising sign for those looking for a tradable upswing in the financials but one needs to be just as cautious here as with stocks in the homebuilding sector which continue to send out confusing signals that turn out to be false bottoms.

WFC  Wells Fargo and Company  

Wells Fargo (WFC) may sink down to new closing lows as it revealed significant write-offs on its mortgage portfolio after the market closed yesterday. In after hours trading the stock was down about 5% and what is most unsettling about the announcement is that much of the asset deterioration was not specifically in the sub prime sector per se. The bank’s announcement underlines the malaise that is now infecting all classes of residential real estate across the nation and which is leading a growing number of "experts" who, in September could see no risks of a recession, are now confidently predicting one.

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