Daily Form July 23, 2007

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
MONDAY JULY 23, 2007       05:52 ET

Friday’s sell-off brought the Russell 2000 (^RUT) to a close just below thte 50 day EMA but as the chart below reveals the upward trendline is still intact. If the pattern of short squeezes, that have become a characteristic when the market reaches down to pivotal levels. is to repeat itself we should see another rally emerging as the week moves forward. But this may have to wait until a little more anxiety has been injected into proceedings to embolden a few more bears.

I would, however, become less sanguine about relying on such short squeezes if this index closes convincingly below 820.

Several banks and financial stocks were hit hard on Friday and the financial services sector fund XLF which was discussed here on Friday seems destined to restest the March low around $32. Unravelling the factors that are causing unease about the prospects for the sector there are several that are looming on the hrizon, and perhaps the most opque are questions about the quality and liquidity of CDO’s and other derivatives that underpin the mortgage market.

On the other hand the picture for long term interest rates looks better now than it did in June. Further strength in Treasury prices with the consequent decline in yields would bring about a re-assessment of the sustainability of the recent breakout above five percent.

The broker/dealer sector index (^XBD) broke out of the well defined channel that I discussed on Friday and several of the investment banks registered new lows for the year in Friday’s session. As with some of the constituents such as Goldman Sachs (GS) which is discussed below the index is approaching its 200 day EMA where support is to be expected.


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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SO  The Southern Company  

As discussed on Friday Southern ran into resistance at the intersection of the moving averages. It would be worth keeping the utilities on the radar this week as the decline in Treasury yields could bring out bargain hunters that take the view that the sector has been unduly punished by the June spike in long term rates. The sector should be immune to the other concerns that are of more concern to the purely financial sector.

GS  The Goldman Sachs Group Inc.  

Goldman Sachs (GS) broke below a trend line on Friday but is now approaching a level near $205 where chart support and the 200 day EMA should provide some support. The real test may come later after the quality of a rally at this stage may provide some clues as to the severity or otherwise of the liquidity concerns regarding certain credit derivatives.

LEH  Lehman Brothers Holdings Inc.  

The chart for Lehman Brothers (LEH) looks less resilient than Goldman and on Friday a new one year low was registered. If the short sellers that have been attracted to the sector are rattled and squeezed in coming sessions Lehman can be expected to mount an abrupt and powerful rally.

WAG  Walgreen Company  

Walgreen (WAG) has a bullish looking wedge pattern and evidence of accumulation. The strength shown in Friday’s broad based sell-off suggests that the stock has relative strength and upward momentum.