Daily Form September 19, 2007

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
WEDNESDAY SEPTEMBER 19, 2007       06:06 ET

The rejoicing at the FOMC announcement yesterday continued beyond the US markets and has generated powerful rallies across the global equity markets. The fifty basis points of easing, and the accompanying statement that suggested that further easing may be required, was perhaps even more than traders were hoping for and the explosive rally allowed many indices to blast through obvious hurdles. As I said yesterday if the Russell 2000 (^RUT) was able to break convincingly above the 800 level then the mid-July highs come back into play. The four percent gain in the small cap index now puts this target firmly on the agenda.

The Hang Seng closed up almost 1000 points or 4%, the Nikkei 225 managed a 3.5% gain and, as this is being written, the European markets are all up approximately two percent. Let’s see what the follow through looks like in the coming days but it is hard to question those long green candlesticks that are all over the charts that I scanned this morning.

In particular there were some very nice green candlesticks on stocks discussed for the long side in the Daily Form Commentary over the last few days. The homebuilders took off as expected and Hovnanian (HOV), mentioned here yesterday, moved up a stunning 28% with the added bonus that the open was very close to Monday’s close providing an excellent entry opportunity. Lehman Bros (LEH) also mentioned favorably yesterday morning added 10% with similar entry possibilities and Kroger (KR) that I tipped in Monday’s commentary moved up almost eight percent from Tuesday’s open.

The move in the banking index (^BKX) reflects the very positive reception that traders gave to banking shares as the FOMC’s decision provides them with a more favorable interest rate environment. For now I shall put aside the complex structural issues that I touched on yesterday but there is the lingering suspicion that these will have only been tangentially ameliorated by the fed funds easing. The index faces a chart hurdle and the 200 day EMA at 112.

One of the very few charts to show a long red candlestick from yesterday’s trading was for the CBOE Volatility Index (^VIX) which dropped by 23%. While the market’s perception of fear may have undergone a major shift yesterday the likelihood of strong moves in both directions persists and it may be that this index over-reacted to the jubilant mood yesterday afternoon.

This is what was said in yesterday’s commentary about the homebuilding sector -

Could it be that the market has digested all of the negatives for the homebuilding sector? The chart for the ETF for the sector, XHB, shows the relentless decline over the course of the last few months in which the sector has followed the 20 day EMA all the way down. But there are some positive divergences emerging in the MACD and MFI charts and it may be that the recognition that the FOMC is officially "worried about" a slowdown is the news that could create some buying and short covering in the sector.


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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HOV  Hovnanian Enterprises  

I did not expect quite the explosive move when I noted yesterday that Hovnanian (HOV) stock appears to have been sold down to levels where the risk/reward ratio favors some kind of bounce.

KR  The Kroger Co.  

Monday’s positive comments on Kroger (KR) came to fruition yesterday as the stock tacked on almost eight percent.

LEH  Lehman Brothers Holdings Inc.  

Lehman Brothers (LEH) surprised traders with a less damaging earnings statement than some had feared and was rewarded with a ten percent uplift. This was another of yesterday’s recommendations.

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