Daily Form July 9, 2007

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
MONDAY JULY 9, 2007       06:07 ET

In reviewing the charts for a holiday shortened week that was mainly characterized by its light volume the chart that most caught our attention was for the Nasdaq Composite (^IXIC). The index continued its push last week to a succession of seven year highs. The trend line appears to be firmly intact as the potential violation from a couple of weeks ago has been invalidated.

Asset allocators appear to be switching in earnest from other interest sensitive sectors of the marker to the technology stocks and as long as this pattern persists the bulls could retain the upper hand. However the move back in yields, especially based on trader’s reaction to the employment data, still provides a backdrop where intraday volatility could pick up as volume returns, and we sense that there is an increasing risk that those of a more bearish persuasion will feel emboldened to test trendline support again.

We are showing again a very long term chart for Treasury yields and how the recent uptrend in yields appears to have broken a very long term trend line. The chart below shows monthly closes since 1990 for the five year Treasury note. The recent break above the descending trendline through the highs is still pointing towards a foundational change in the interest rate environment and just over the course of last week the yield on the five year note moved back up 20 basis points.

The chart below shows the daily Euro/USD cross rates for the last five years. We have inserted the 100 day volatility bands based on the daily closes and would point to the two points A and B where the tell tale signs that having reached the two bands a succession of lower highs or higher lows pointed to the next directional changes. The point B where we are at present is still unclear as to whether a lower high will be validated soon, which could also coincide with a call that a double top may have formed. Alternatively a new breakout could see further gains for the currency as global hedge funds continue to see dollar weakness as a one way bet.

The forex market is unusually interesting at the moment with several cross rates at historic junctures and also with persistent weakness in the Japanese yen which we have illustrated below.

The chart for gold, as represented by the exchange traded fund GLD, shows that the metal is at a possibly significant breakout level. The downward channel is well defined but Friday’s action which coincided with developments for some of the mining stocks (see NEM below) brought the close to the verge of an upward break from the channel. Also worth considering is the fact that the recent move down the channel stalled at point B and thus failed to reach back to A the previous low from 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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KR  The Kroger Co.  

Kroger (KR) may struggle to regain a foothold above the intersection of the two short term moving averages.

GE  General Electric Company  

The daily chart for GE illustrates quite well the very low volumes that were registered for many equities last week and the tiny intraday ranges.There are some negative momentum and money flow divergences that are manifesting themselves and we will be monitoring this week’s progress as we approach the mid June high again.


Using similar reasoning to our discussion of the Euro above we are also watching the cross rate between Sterling and the Japanese yen. This cross rate which embodies many of the issues that surround the carry trade also appears to be at a significant juncture. As before A and B show clear inflection points but the pattern at C suggests we still need further evidence that a directional change could be imminent. However it is fair to say that the probability of a cross rate decline is increasing as we tag the upper 100 day volatility band.

NEM  Newmont Mining Corporation  

Newmont Mining (NEM) surged by more than five percent on Friday on very heavy volume. Tied to an announcement that the mining company has dicontinued its forward hedging activities, Friday’s surge has brought the stock to a potential breakout level.

However we need to digest the implications of Friday’s news in the sector and watch the level of the precious metal itself to better guage the intermediate direction.