Daily Form August 7, 2007

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
TUESDAY AUGUST 7, 2007       06:50 ET

For several indices the action yesterday reversed almost exactly the losses from Friday. The 286 point gain in the DJIA was within points of the loss experienced at the end of last week and the S&P 500 moved back 2.4% virtually eradicating the 2.7% loss from Friday’s session.

Both sessions exhibited the hallmark characteristics of a trend day which is that the open and close lie at the extremes of the intraday range. These sessions, which from a market statistics point of view have some very interesting features, (I devote a chapter to the topic in Long/Short Market Dynamics) are a sign that, for the particular time frame in question only, traders reach a remarkably coherent view about price direction. Also notable however is that they are not usually a reliable guide to price direction in the ensuing sessions.

The markets will be waiting on FOMC deliberations and the intutition is that what was seen yesterday is that those who became overly enthusiastic on the short side in Friday’s trading have paid the price for the zeal in yesterday’s rally and returned to a more neutral stance before the Fed shows its hand.

A large number of the financial stocks moved up by more than five percent yesterday and included a couple of standout performances from Fannie Mae (FNM), which moved up by more than ten percent, and Freddie Mac (FRE), with a gain of almost eight percent. Citigroup (C) and Wells Fargo (WFC), which is featured below, also saw gains of close to six percent.

XLF, the sector fund for the financial services had been slumping almost daily since mid July and a bounce and short covering was to be expected. Just how much further it can rally is questionable as the change in the complexion of the market in general, and this sector in particular, is one where aggressive traders see price gains and relief rallies as opportunities to re-position on the short side at higher prices.

The small cap Russell 2000 (^RUT) was the laggard performer amongst the broader equity indices and its gain was confined to just 0.6%.


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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The chart for the semiconductor sector fund, IGW, reveals how support arrived on cue in conjunction with the 200 day EMA and an area of previous chart support/resistance. Volume was stronger on the uptick yesterday than it was during Friday’s session suggesting that further progress towards $67 is to be expected.

WFC  Wells Fargo and Company  

The chart for Wells Fargo (WFC) reveals the powerful surge which, undoubtedly assisted by a serious amount of short covering has brought the stock back to a region where two key moving averages are intersecting.

TIF  Tiffany and Co.  

Tiffany (TIF) was one of the few stocks that was unable to find any benefit from yesterday’s powerful rally as it dropped more than five percent on very heavy volume. The long lower tail suggests that some buyers stepped in to arrest the decline as the stock hit the 200 day EMA and a pivotal chart level.

VSH  Vishay Intertechnology  

Featured in the column yesterday, Vishay Intertechnology (VSH) continued further down as anticipated, but has now satisfied my profit objectives and the short positon has been completely covered.