Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
FRIDAY NOVEMBER 9, 2007 03:28 ET
Pronounced weakness in many of the recent high flying technology stocks was yesterday’s biggest story and when combined with continued erosion in the banking sector seen early in the session there was the capacity for things to turn quite ugly. At one point yesterday the Nasdaq 100 (^NDX) had dropped by more than four percent and tested the breakout level that has been marked on the chart.
The long lower tail which reflects the strong reversal behavior that took place across the equity markets in the afternoon may provide some comfort to the bulls today that a recovery/bounce pattern has been initiated.
From a fibonacci perspective the index made a 162% extension move up to its recent peak (based on the swing high and low from the summer correction) and has in just a few sessions retraced most of the move. I would not rely on the fact that the breakout/support level appears to have held as it seems unlikely that the overdue correction for the techs was just a one day affair. I am still quite wary of the near term direction and the propensity for strong whipsaw behavior and plan to trade lightly today if at all.
Another chart that illustrates the strong reversal behavior for most of the broad indices is found on the S&P 500 (^SPC). The index managed to close at almost exactly the 200 day EMA with a very modest loss and the doji star formation/hammer shows the extent of the recovery off the session low. I am pleased that I stepped aside in yesterday’s session as the erratic price moves, while attractive to scalping, do not suit the position trading model.
There was a further downdraft in the investment banks and the sector index came very close to the mid-August intraday low. Goldman Sachs (GS) came down just below $210 where some support was found. It was a recovery in the banks and financial sector that fuelled the powerful reversal rally on August 16 but despite some recovery efforts in the money center banks yesterday the sector failed to show similar dynamics to those seen when the August meltdown looked like getting out of control.
TRADE OPPORTUNITIES/SETUPS FOR FRIDAY NOVEMBER 9, 2007
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CSCO Cisco Systems Inc.
The precipitating factor for the major retrenchment in the techs yesterday appears to have been the comments of John Chambers the CEO of Cisco Systems that financial services companies were holding back on IT infrastructure projects. More likely as the probable "cause" was the fact that the asset managers that have been piling into large tech names were looking around at the technical damage being sustained in most other sectors of the market and suffered a serious attack of vertigo.
ORCL Oracle Corporation
Oracle (ORCL) also had a bad day dropping almost eight percent and the momentum and money charts reveal just how many negative divergences lay beneath the price high from earlier this week.
IBM International Business Machines Corp.
Another tech stock that corrected abruptly was IBM which was also featured as a short recommendation in last weekend’s commentary.
FMD The First Marblehead Corporation
One final short recommendation - First Marblehead (FMD) - from last weekend’s commentary has delivered consistently all week.
WFR MEMC Electronic Materials
MEMC Electronics (WFR), mentioned earlier this week, continued to act bullishly yesterday despite troubles in the technology sector