Daily Form July 16, 2007

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
MONDAY JULY 16, 2007       06:50 ET

More than seven years ago on March 24, 2000 the S&P 500 cash index (^SPC) achieved an intraday high of 1552.87. Although we have seen all time high closes on the index in recent weeks it was only on Friday that the index achieved a new all time intraday high as the index touched 1555.1. It was perhaps a little surprising that there was so little celebration of this fact in commentary about last week’s performance. Much more discussion was found about the DJIA approaching 14,000 but from a technical perspective this has little signficance.

The remarkable feature of the trading in the latter part of last week was the scrambling by those short the market in general and several sectors specifically (financial in particular) to exit and often reverse their positions as they become increasingly frustrated in their attempts to call an intermediate top in the market.

One of the topics that is covered in Long/Short Market Dynamics is the changing nature and efficacy of the traditional indicators in gauging the underlying momentum of the equity markets. With the plethora of fund managers engaging in short and long/short strategies the dissonance that builds up as larger bets on overall bearish directional strategies are placed is often resolved by explosive rallies and strong reversals. Last Tuesday’s downthrust on strong volume was the cue for a number of institutions to come out in force and exploit the fragile conviction of funds trying to pick a top.

Whether the achievement of an historic intraday high has any sense of Mission Accomplished remains to be seen.

The Russell 2000 (^RUT) closed marginally above its previous all time high achieved on June 4th.

As this is being written Asian trading has completed for Monday and many indices retreated from record highs with the Shanghai index pulling back by more than two percent. The Nikkei 225 was closed for a public holiday in Japan but the chart from last Friday’s close shows how the index has rallied in a clearly defined channel from the March lows and now confronts the previous high from late February. Interestingly, and in comparison with the US indices the Japanese chart shows that the index has still not advanced beyond where it was before the sub-prime sell off in late February.


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

GE  General Electric Company  

We featured General Electric (GE) in last Monday’s commentary and suggested that the tiny candlesticks from the first week in July’s quiet trading should give way to some directional clarity later in the week. We confess to being somewhat surprised by the way that things turned out and still do not feel that there is any more clarity now than there was before. In the middle of last week we began to suspect that a lower high had formed but with the action across the board at the end of last week, and for the stock in particular in the wake of earnings and an outlook that were welcomed by traders, those that were short the stock would have regretted this positioning and many would have panicked to get out.

In Friday’s trading we see a striking shooting star on heavy volume that turned back at the $40 level. Under many market conditions this would suggest another attractive reward/risk proposition on the short side. But this could prove to be yet another casualty to the predatory instincts of trading desks that are gunning the short side and which are currently paying off in spades.

CAL  Continental Airlines Inc.  

Continental Airlines (CAL) has a slightly unorthodox flag formation but the volume characteristics are in accordance with a bullish interpretation.

In coming weeks we shall be introducing a new feature at the website which will enable users to examine the reliability of certain patterns that we track daily. The feature will show, based on extensive back testing, the results and portfolio metrics for implementing buy or sell decisions based upon the occurrence of instances of particular setups.

It can be revealed that the TradeWithForm Bull Flag logic is one of the more consistent performers over the long haul (going back to 1999) with a more than sixty percent Win/Loss ratio. However this needs to placed within the context of money management parameters and other factors that will be discussed in greater detail when the new section to the website is launched.

RIG  Transocean Inc.  

Transocean (RIG) appear to be losing momentum and undergoing some distribution near its recent highs.