Daily Form July 11, 2007

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
WEDNESDAY JULY 11, 2007       06:06 ET

The theme within the market that we have alluded to a number of times recently manifested itself in force yesterday as the financial sector (and this time it included the investment banks) came under presssure, whereas in comparison the technology focused Nasdaq showed relative outperformance. As we point out below when stocks such as Wells Fargo (WFC) and Lehman Brothers (LEH) sell off hard and break decisively below their 200 day EMA’s there should be a pause for reflection for the overall market. However the ubiquitous liquidity that is fuelling asset re-allocation rather than retrenchment is seeing new money being put to work in such sectors as semiconductors as it comes out of the banks and utilities.

The banking index (^BKX) seems to be headed back to the March low and as the chart illustrates the series of lower highs has provided vital clues to the way that matters are unfolding.

The tiny doji that we commented on yesterday in the Russell 2000 chart for Monday is often found at inflection points and the trend day yesterday which took us below the 20 day EMA seems to be headed further towards a test of the upward trend line in the region around 825 that we have marked. A clear break of that trendline would signal that the asset re-allocation process, that is founded upon a conviction that the bullish tone is still underpinning the case for equities, may have to be re-evaluated.

The semiconductor sector emerged relatively unscathed in yesterday’s broad sell-off. The chart for IGW shows relatively subdued volume but the combination shooting star/doji candlestick can sometimes be construed as representing a potential turning point.

We would suggest that if this sector succumbs to weakness in coming sessions this could signify that a more cautious tone to proceedings may have taken hold on the part of hitherto optimistic asset managers.


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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LEH  Lehman Brothers Holdings Inc.  

Lehman Brothers (LEH) suffered as sub-prime issues moved back to center stage yesterday. The five percent drop on heavy volume suggests that we will see a retest of the late March low in the vicinity of $68.

WFC  Wells Fargo and Company  

Wells Fargo (WFC) closed below its 200 day EMA on twice the average daily volume. The chart shows a rather well defined topping process that has been unfolding since the rebound from the first sub-prime sell off in early March.

GE  General Electric Company  

We featured General Electric (GE) in Monday’s commentary and suggested that the tiny candlesticks from last week’s quiet trading should give way to some directional clarity this week. The possibility now exists that a lower high has formed and we are on the verge of a test of the upward trendline that coincides closely with the 50 day EMA.

ATVI  Activision Inc.  

Although the overall market may be at a transitionary juncture and long setups have to be scrutinized carefully at present there is one that caught our attention today. Activision (ATVI) moved up more than four percent yesterday on very substantial volume despite the overall weakness and appears to be ready to break above the downward trendline that we have marked.