Daily Form August 13, 2007

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
MONDAY AUGUST 13, 2007       06:23 ET

I would expect to see some efforts to stabilize at or near to Friday’s closing levels and there was some evidence of buying in the oversold securities at the end of last week. In particular the chart for the Nasdaq Composite (^IXIC) suggests that this index will want to retest the area where the two shorter term EMA’s are converging in the vicinity of 2600. The upward slant to the recent lows and the fact that the index appears to have survived a successful challenge of the 200 day EMA are encouraging signs for those that are expecting a relief rally.

Having said that there are too many uncertainties in the market at present, owing to the risks of further shocks from the credit markets, that it would be rash to count, this time, on the re-emergence of the bullish dynamics that underpinned the swift recovery and progress following the March lows.

The chart for the Russell 2000 (^RUT) shows that the index suffered relatively less in the rout at the end of last week. On the other hand the index will face a significant near term hurdle as it confronts the 800 level which coincides with the 200 day EMA.

From a high level perspective, if we see a major surprise this week in the CDO and credit derivatives market we should expect the whole market to ratchet lower. Key levels on the S&P 500 this week are 1430 or thereabouts which is the more recent intraday low and below that 1380 which represents the early March low. The major problem that the markets face at the moment is the lack of transparency with regard to the holdings of the vast array of structured credit products by the major hedge funds and institutional trading desks. Until traders can get comfortable about the likelihood of, and extent of, any nasty surprises in this vital sector of the financial system, the markets should be expected to remain highly volatile.

Most of the focus recently, for obvious reasons, has been on stocks in the financial services but the energy market has also been tracing out its own correction that closely corresponds from a chart perspective with the action in the broader stock indices. The chart for the Oil index (^XOI) provides evidence of chart support/resistance close to Friday’s closing levels which may provide sector specific support in addition to that which might arouse from a rebound in the overall market.

Eventually traders will be disentangling the global factors that drive this sector from the overall concerns and economic consequences of credit market problems. To the extent that these consequences are not considered to jeopardize the underlying strength of the "real" economy the recent weakness in some energy stocks may be seen as a buying opportunity for large institutions and hedge funds.

Rumors swept the market late last week that some banks, specifically Goldman Sachs (GS), are suffering large losses within either internal hedge funds or those for whom they act as prime broker. It was reported over the weekend that GS’s Global Alpha fund may have lost more than one quarter of its value during the last few weeks of market weakness.

I have focused on the investment banks many times over the last few months but one chart that perhaps is quite revealing is the weekly chart below for Goldman Sachs which well illustrates the kind of negative divergence in momentum that accompanied the nominal new price highs for the bank in April and May.

I shall be discussing this chart further today on CNBC’s European Closing Bell at around 16:20 London time.


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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ALTR  Altera Corp.  

Altera Corp (ALTR) produced a contrarian performance during the tumult of last Thursday’s trading. Friday’s inside day retreat on reduced volume after a glimpse at a chart breakout could lead to further consolidation, but in the intermediate term I would favor a long position.

CSCO  Cisco Systems Inc.  

I spent some time over this weekend reviewing longer term charts looking for where the leadership might emerge to take the market beyond the current turmoil and provide a haven for the money that is being re-allocated from the financial services sector. Undoubtedly some big name tech charts are looking promising and Cisco (CSCO) is one that should be rewarding on the long side in the intermediate term.

PH  Parker-Hannifin Corp.  

Parker-Hannifin (PH) will probably want to test the confluence of the 20 and 50 day EMA’s in the region of $100 during coming sessions.

ANF  Abercrombie and Fitch Co.  

One other chart that reveals a constructive pattern in both the near term and longer term is Abercrombie and Fitch (ANF).