Daily Form January 9, 2008

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
WEDNESDAY JANUARY 9, 2008       06:40 ET

The bears were rewarded for being patient in yesterday’s session as the early afternoon attempts to try to stabilize failed. Around 2pm New York time the intraday charts gave rise to the notion that we might be on the verge of some respite from the recent selling onslaught but in the last one and a half hours of trading the selling returned with a vengeance.

The S&P 500 (^SPC) closed below the mid-August lowest close but as the chart illustrates the index is now in a rather treacherous zone where the mid August intraday low would seem to be a probable target for testing. As I suggested on Monday I would not be surprised to see us thrashing around in this zone while aggressively bearish traders stay on the lookout for any signs of meaningful bids coming into the market.

Similar reasoning can be applied to the Nasdaq Composite (^IXIC) which is now more than 400 points, or fifteen percent, below its multi year high close of 2859 achieved on October 31st last year. Reviewing the longer term charts there is meaningful chart support in the 2340 region if we take out the intraday low of 2386 from August 16th.

Readers may recall how frequently I used to feature the chart of the broker/dealer sector (^XBD) in the summer and fall of 2007 as the calamities with structured financial products became mainstream news. Having not reviewed the sector in the Daily Form commentary for some time it seemed worthwhile to step back and take a longer term view of where we currently stand.

The weekly chart extends back to early 2003 where the bull market was born and as with some of the other sector charts in the financial area and consumer facing sectors the simplest view is that the bullish market dynamics that have prevailed for almost five years are now broken. To be added to the obvious drop below the trendline is the fact that the sector index has now broken below the 200 week EMA. Most concerning is the absence of any obvious chart support until we reach down almost another twenty percent towards the 150 area. I am not suggesting that we are going to that level in a hurry but we are now in territory where chart diagnostics cannot be very reliable.


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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SGP  Schering-Plough Corp.  

Schering Plough (SGP) defied the market yesterday to produce one of the few genuinely bullish looking charts in the immediate term.

ELON  Echelon Corporation  

As follow up to a couple of recent charts that I have featured Echelon Corporation (ELON) failed to take any notice as it approached the possible support of all three moving averages and rewarded the bears and not the bulls as I had intimated.

GMKT  Gmarket Inc.  

In Monday’s column I cited GMarket (GMKT) which was revealing an Evening star candlestick pattern and the slide continued but the stock has now reached a level where shorts should be covered and where a bounce might be expected.

JEC  Jacobs Engineering Group  

Also in Monday’s column I suggested that "One of the few charts that looks to be in the early stages of a bearish formation, and therefore has more potential for immediate downside action is for Jacobs Engineering (JEC). I would be looking for a retreat to the 50 day EMA just below $90 as a first target."

Selling Monday’s open and covering at the end of yesterday’s session would have produced an almost ten percent gain and more or less in line with the specified target.

AAP  Advance Auto Parts Inc.  

As if to highlight how hard this market is to trade for a position trader the chart for Advanced Auto Parts (AAP) shows three consecutive abrupt reversals. As with many other sloppy patterns this is keeping me quite cautious at present.

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