Daily Form June 1, 2007

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
FRIDAY JUNE 1, 2007       07:05 ET

Earlier this week we commented on the broker/dealer sector (^XBD) which is one of our favorite guages for the overall market. We noted that the sector had failed to make any signficant progress since the beginning of 2007, achieving its highs for the year in early January. The recovery from the late February/early March sell off appeared to have stalled at the pre-correction levels. Just yesterday the index delivered the break away activity that propelled the sector to an all time closing high.

The patterns that we have indicated in a couple of places on the chart reveal that the classic formation that can be attributed to William O’Neill shows itself to be a useful anticipator of break away price moves. Our only cautionary note is that false breakouts can sometimes be seen prior to market inflection points and that the other important financial sector index (^BKX), which comprises the money center banks, registered just such a "false" breakout immediately prior to the large correction that began in late February.

Clive Corcoran will be a guest on European Closing Bell this afternoon on CNBC Europe. The program can also be seen in the US market if you are a subscriber to the CNBC World service and you select Europe at approximately 11:15 Eastern.

Almost exactly on cue the yield on the ten year Treasury note has made its way back to the previous 2007 high of 4.9% as the market prepares to digest the May employment data to be released this morning.

As we have suggested over the last few days there seems to us to be evidence of market dissonance in the fact that equity traders are taking comfort in the fact that weak GDP numbers and signs of weakness in the housing market with its possible ripple through effects for the consumer seem to be suggesting that the Federal Reserve may have finished tightening and even be contemplating easing.

On the other hand the Treasury market seems to be exploring higher yields with a slight steepening of the yield curve at the long end. One possible explanation for this is the fact that Treasury traders are sensing that despite a slowdown in the US, the world economy is still showing signs of vigor and a Chinese market that is looking to be over exuberant. Commodity based inflationary pressures could keep an upward pressure on long term yields and if there was to be a relaxation in short term rates this would rattle the bond vigilantes.

Perhaps the upward move in the gold market yesterday is also signalling that there is a misperception amongst equity traders (which is being stirred on by the M&A activity) that the Fed can be as accomodating as they would like it to be without enhancing inflationary concerns.

While the action in most of the equity indices was muted yesterday as traders digested the weaker than expected GDP numbers and prepared for today’s employment data the Nasdaq Composite (^IXIC) outperformed on the upside as it registered a 0.5% increase to close at a new multi-year high.

The chart reveals that an "island" formation was registered which, coming as it does at a multi-period high, has the possibility of being part of a reversal pattern which could portend a key inflection point. As we have indicated on the chart there is an intersection that should provide support if there is a re-thinking of the half full/half empty scenario we discussed yesterday. The 2525 level marks an area of chart support/resistance and also coincides with the 50 day EMA for the index.

If that level is violated in coming sessions it would suggest to us that there would have been a significant transition in the outlook for US equities.


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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XLY  SPDR Consumer Discretionary Sector  

The ETF for the consumer discretionary sector, XLY has reached back to challenge its February highs and we shall be watching how perceptions about the consumer sector fare in coming sessions in the light of the economic data. Once again we sense that the economic news flow is being interpreted positively by too many sectors that cannot all be right about the tug of war between higher long term rates and signs of a US slowdown.

XLP  SPDR Consumer Staples Sector  

The consumer staples sector has actually broken to a new all time closing high but there are some notable divergences in the MACD and MFI indicators.

INTU  Intuit Inc.  

The only individual stock chart that we shall mention today is for Intuit (INTU) which has fairly well defined bullish flag formation following the gap up on heavy volume on May 18th. The stock is also approaching the intersection of key moving averages and may find that this will bring about a resumption in upward momentum.