Daily Form July 13, 2007

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
FRIDAY JULY 13, 2007       02:24 ET

The broad equity market surged ahead yesterday with the DJIA and the S&P 500 recording historic highs. The theme that we touched on yesterday of whipsaw reversals following recent market downthrusts asserted itself with a vengeance in yesterday’s session and we suspect that a great deal of the momentum behind the move was index traders who were short the market anxiously covering (and reversing) their positions.

This supposition is supported by the relatively underwhelming volume for such a powerful move. As the daily chart for SPY, the S&P 500 proxy, shows the volume yesterday was actually below the moving fifteen day average and also below the volume that accompanied Tuesday’s sell off.

One of the big moves yesterday was seen in the banking sector as the ^BKX index jumped 2.5%. The close on the chart below shows that we managed to move back above the 200 day EMA (green line) but still need to overcome the 50 day EMA (red line). Once again the anecdotal evidence supports the notion that short covering may have been a large factor in the strong rally. Earlier in the week we commented on the fact that Wells Fargo appeared to be breaking down as it dropped below its long term moving average. In yesterday’s reversal activity WFC also moved back to just below the 50 day EMA echoing the action in the sector index.

The retail sector was clearly one of the principal beneficiaries of yesterday’s rally and may well have been a major contributing factor to the strong price moves. The retail sales data that was released early in the session appears to have been the trigger for the bulls to drive the index futures forward with the accompanying short covering. The sector itself gapped on the open and has reached back to within a few points of its recent high close and this time the volume shows far more conviction than can be seen on several of the other sector and index charts.

As discussed yesterday gold has a formidable hurdle to overcome at $660 which equates to $66 for the exchange traded fund, GLD. As can be seen yesterday we still need to adopt a wait and see attitude as the inscrutable spinning top candlestick leaves the matter unresolved.


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.
For full details on time horizons, risk management and hedging techniques please visit http://www.tradewithform.com

SGP  Schering-Plough Corp.  

Implementing a long position based on yesterday’s discussion of Schering Plough (SGP) which had moved above a short term line of resistance on heavy volume in Wednesday’s session would have produced a nice one day profit opportunity, especially as the open yesterday was right in line with Wednesday’s close.

FUL  HB Fuller Co.  

We commented earlier in the week that Fuller (FUL) had a bull flag formation and may be preparing for a further advance. The stock moved ahead more than five percent on the session and we closed out our postion. Once again the volume picture questions the power behind the move as it is customary to see above average volume when price breaks out of the channel from a flag formation.