Daily Form July 24, 2007

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
TUESDAY JULY 24, 2007       07:30 ET

Following Friday’s sell-off on above average volume, somewhat surprisingly there was no follow through on the open yesterday as one might have expected. The market decided to focus on the announcement of new deals and mergers and set off on a move higher. The momentum behind the rally however began to dissipate later in the session and the indices closed below their highs for the session. The S&P 500 (^SPC), like many of the indices, registered an inside session.

The chart for the banking index (^BKX) indicates several recent attempts to rally from downthrusts that have failed. This is a pattern that suggests that the sector is undergoing distribution within the context of some powerful short squeezes. The move down to the lows from March should now provide a real test for the index and an opportunity to see whether bargain hunters can change the underlying weak dynamics.

Gold will soon face a challenge as it returns to the highs from April.


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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HAS  Hasbro Inc.  

The way that the market interprets earnings announcements can sometimes be quite instructive in relation to the chart formations. Last week I noted that Hasbro (HAS) was coming towards a critical threshold in an upward wedge formation and could be preparing for a break above its recent ceiling in coming sessions. As can be seen from the chart the stock gapped upwards on the open yesterday in apparent celebration of the announcement yesterday but the open for the day was more or less the day’s high and the stock sold off rather aggressively as greater scrutiny of the company’s earnings report and outlook failed to match expectations.

CAL  Continental Airlines Inc.  

Another example of the potential pitfalls of chart formations during earnings season relates to Continental Airlines (CAL) which appeared to have a bull flag developing last week. The earnings were initially welcomed by the market but on closer inspection the mood turned less favorable and led to the long red candlestick in last Thursday’s trading.

As with Hasbro the initial reaction to the report could have been surmised from the chart formation, which explains the initial opening gap surges in both cases, but the quality of the earnings for CAL as for HAS failed to match the elevated expectations and those that were initially enthused by the announcements were faded quite aggressively.