Daily Form June 22, 2007

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
FRIDAY JUNE 22, 2007       05:28 ET

In yesterday’s discussion of the chart formation for the S&P 500 (^SPC) we commented on the possibility that a lower high plateau may have formed following the recovery from the early June sell-off. Looking at several charts today, not only for the indices but also individual stocks, this pattern is beginning to intrigue us. On the chart for the Russell 2000 (^RUT) we can simply characterize a template which is widespread at the moment.

The point A marks a recent multi-period high (in the case of the Russell 2000 it was an all time high as for the S&P 500 in yesterday’s discussion) and point B which now appears to be in place following Wednesday’s sell of shows that we failed to reach back to the intraday levels seen in conjunction with A. But as the point C shows there is in place a rising trendline through recent lows. What in effect is happening is that price action is being squeezed into a triangular pattern which will eventually need to be resolved by a breakout. Which way we break will have much to do with interest rate expectations and long term yields. At the moment the evidence is mounting that central banks are contemplating further rises rather than any imminent easing.

The chart for the homebuilders sector XHB shows that prices have reached down to an area of potential chart support in the region of $32. Some technicians may be able to discern a nested head and shoulders pattern lurking within the data, although we would proceed cautiously with that interpretation. However with the steep descending line from the January high down through the May high we would suggest proceeding cautiously with the sector generally.

After moving higher last week on subdued volume, the semiconductor stocks moved up confidently with much more impressive volume yesterday. Could this be the signal for the overall market to push further upwards and remove the lower top phenomenon we have discussed? Well possibly yes, but it could also be seen as a spirited attempt by the bulls to energize the overall market or (from a more predatory perspective) as an attempt to squeeze nervous shorts back to a level where macro index players want to establish more strident short positions.


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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GOOG  Google Inc.  

Google (GOOG) illustrates the spectre of a lower high quite well and the MACD and MFI charts are suggesting that we may have seen much of the buying pressure already expended.

MCD  McDonald"s Corporation  

McDonald’s (MCD) less obviously reveals the lower high phenomenon but the pattern could be pointing to a double top with deteriorating momentum and money flow dynamics.

WYNN  Wynn Resorts Limited  

Wynn Resorts (WYNN) has retreated to a level where there is not only chart support but the stock registered a hammer candlestick as it straddled the 200 day EMA. If a bounce fails to materialize the stock has no obvious support down to the low $70’s.