Daily Form June 8, 2007

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
FRIDAY JUNE 8, 2007       06:58 ET

Over the last three weeks we have repeatedly drawn attention to the upward march of long term bond yields and the increasing headwinds that this could pose to equities. A week ago, when interviewed on CNBC Europe, Clive Corcoran suggested that as the yield on the ten year note crossed the five percent barrier this could cause a major upset for equities.

The weekly chart below shows how the yield has surged since mid May when it moved above both the 20 and 50 week EMA. The yield has added more than fity basis points in just over four weeks and we are now within striking distance of the April/May 2006 yields above 5.2% which contributed to one of the more serious corrections within the whole bull move since mid 2003.

Commodity based inflation, rampant M&A activity fuelled by excess liquidity, euphoria in the Chinese markets and the slow but gradual upward pressure on short term rates within Europe are all factors that will keep the US bond market under pressure. Just how much higher yields have to go will be the key to how severe the equity market correction will be.

The Dow Jones Utilities index (^DJU) fell another 3.3% yesterday as the asset allocators continue to dump interest sensitive issues. The 480 level would seem to be an area of potential chart support.

We would suggest that it will be useful to keep an eye on the 2525 level (or thereabouts) on the Nasdaq Composite (^IXIC) as a decisive break below that level would suggest that the current correction has much further to go in duration and perhaps severity as well. Another important chart level will be the 808 level on the Russell 2000 (^RUT). This was the intraday low on May 1st and a close below that level would violate the uptrending line through the lows for the small cap index since early March.


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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C  Citigroup Inc.  

Citigroup (C) closed below its 50 day EMA yesterday and may be headed for a testing of the $51 level.

BK  The Bank of New York Co.  

The chart for Bank of New York (BK) shows a relatively weaker picture than for Citigroup (C) as the 200 day EMA is now about to be tested as well as the March low. A failure at the $38 level would also put in jeopardy the large upward gap on the charts from last December 4th when the stock surged by 12% on the announcement of the take over of Mellon Financial.

GS  The Goldman Sachs Group Inc.  

The money center banks have been one of the principal casualties of the interest rate fears of the last week but the investment banks are also beginning to show evidence of liquidations as well.

The chart for Goldman Sachs (GS) reveals a potential violation of the uptrend through the lows since early March and a close below the 50 day EMA.