Daily Form August 24, 2007

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
FRIDAY AUGUST 24, 2007       05:33 ET

Option writers were extravagantly rewarded during the recent periods of exceptional volatility and put buyers paid large premiums for their protection but the markets now appear to be settling down to a calmer, less turbulent trading conditions. As if to underline the point the DJIA finished the session within a point of its previous close and similar small changes were seen in the other indices including the UK’s FTSE.

The largest move was seen in the Russell 2000 (^RUT) which, as discussed in yesterday’s column, encountered resistance at the 800 level and the 200 day EMA and fell back by 1.3%. As we move into a week of late summer public holidays (Monday is a holiday in the UK and the following Monday is Labour Day in the US) it is likely that, if the relative calm can be prolonged and traders have increased confidence that they can leave their desks for the beach, the markets may enter a period of consolidation.

On the subject of heading to the beach, I shall be away myself for the next two weeks but before leaving I will be a guest this afternoon on CNBC’s European Closing Bell at approximately 16:20 London time.

The Nasdaq Composite (^IXIC) has also entered a zone, between the 200 day EMA below and the 50 day EMA above, where some consolidation and price congestion may appear.

The banking index (^BKX) is forming a triangular formation as it faces a quite well defined chart hurdle above current prices. As the chart annotations suggest the 112 level will provide a real test for those that believe that the recent credit market woes have been largely discounted and that with a more accommodative Federal Reserve the backdrop to the financial economy is improving.

Certainly there have been some notable moves in the sector and Wells Fargo (WFC) appears to be in the process of forming a bullish flag just after pulling back from its recent historic high.


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

CPKI  California Pizza Kitchen  

A lot of the focus at present is on the stamina of the consumer sector. Consumer demand represents almost two thirds of US economic activity and consumers have hitherto proven remarkably resilient during periods of relative adversity. Analysts will, even more feverishly than ususal, be monitoring all vital signs to see whether consumers are going to retain their acquisitive appetites in the coming months or whether the housing downturn and decreased availability of easy credit is going to lead to a significant slowdown.

Retailing and consumer discretionary stocks are revealing some of the more interesting patterns. California Pizza Kitchen (CPKI) moved down steadily throughout June and July but now appears to be in a basing pattern with signs of accumulation. The 50 day EMA (red line) corresponds quite closely to a declining trend line through the highs and the stock will need to take on this hurdle before it can turn positively bullish but the momentum appears to have transitioned noticeably from the previous negative tone.

LTD  Limited Brands Inc.  

Limited Brands (LTD) has a similar downward trendline to CPKI but this time it follows the 20 day EMA (blue line). The stock peeked above this line yesterday and once again the money flow dynamics have turned positive.

HSY  Hershey Foods Corporation  

Another stock that faces a similar down trend hurdle is Hershey (HSY). The main reservation preventing me from getting too enthusiastic about this stock is the monthly chart which looks distinctly bearish and it would seem that any upward progress in the short term will run into strong head winds in the longer term.