Daily Form June 30, 2008

Profit Patterns and Risk Management For Active Traders
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MONDAY JUNE 30, 2008       06:41 ET

In Friday’s commentary and when interviewed on CNBC’s European Closing Bell that afternoon I alluded to the nature of the orderly decline across the US equity indices. This gradual and methodical fall is what is creating the impression that we are witnessing a slow motion crash The chart below for the S&P 500 (^SPC) shows the 20 day volatility bands constructed at two standard deviations either side of the 20 day EMA. In essence the price action going back to late last year shows a persistent rather than exceptional rise and decline in the context of inter-day volatility.

There has been enhanced intraday volatility but across the end of day time frame the recent sell-off has been statistically well behaved. The one exception to this, which, perhaps, tends to underline the rule, was the extreme behavior that occurred in late January and which occasioned the Fed’s first major rate cuts. Extreme reactions (i.e. those that lie outside the 95% level of probability implied by the two standard deviations channel) are seen at major bear market bottoms and the fact that we have not seen one yet suggests that we still have some way to go yet. This is not to suggest that we are about to see a major crash episode, in fact I favor the view that we get another short term rally before we see the real base of this bear market.


The behavior of the CBOE Volatility Index (^VIX) supports the hypothesis that I was developing above in relation to the actual price behavior of the S&P 500. There were severe spikes in January and March but most recently during the June decline the actual variability of implied volatility also suggests that the sell-off should best be seen as orderly and a component of inter-market long/short strategies with a bearish equity leg rather than a panic stricken mass exodus from the long side.

Looking at a weekly time frame Germany’s Dax index (^GDAXI) seems set to have a rendezvous with the 6200 level before a stable base could be built for an intermediate term rally. Not that I am forecasting this but the 5300 area also could become a target on the longer term horizon.

TRADE OPPORTUNITIES/SETUPS FOR MONDAY JUNE 30, 2008



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

FXY  Currency Shares Japanese Yen  

The forex markets look set to have a very interesting week with the ECB rate decision and a possible challenge by the euro of the $1.60 level. Also worth monitoring this week is the Japanese yen which is continuing to show strength in most of the more closely followed cross rates. Against the US dollar the chart below shows that the Japanese currency could be ready to break above a long term downtrend. If this is sustainable this could also add further disruption to global capital flows.



XLI  Industrial Select Sector SPDR  

A sector fund that tracks the industrial and manufacturing sector, XLI, is showing evidence of capital exodus and distribution. The three levels indicated on the weekly chart show a succession of lower highs and last week’s loss of more than six percent came on an increase in volume. Some support could kick in at the 200 week EMA but overall the complexion of the sector is becoming bearish.



EWU  iShares MSCI United Kingdom Index  

EWU, which tracks the performance of the MSCI UK index, and which was discussed here a couple of times last week would have produced a good return on the short side throughout last week and especially in Friday’s session.



UYG  Ultra Financials ProShares  

UYG is a 2:1 leveraged tracker for the financials and allows one to benefit more aggressively from any rebound in the sector. Once again I would point to the price behavior within the volatility channel to underline the fact that the decline has been persistent and orderly rather than chaotic and panic driven. As already suggested it may require a more cataclysmic episode before there is a sustainable base for the financials and the overall equity market.

Daily Form June 27, 2008

CLIVE CORCORAN WILL BE A GUEST ANALYST ON CNBC's EUROPEAN CLOSING BELL TODAY

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
FRIDAY JUNE 27, 2008       07:39 ET

The S&P 500 (^SPC) closed within one percent of the critical March 17 low.

So are we headed for a break down or do we rally?

Without meaning to sound flippant, it would be rather "cute" if the market sold down below the 1270 level in a panic mode and then produced a massive short covering rally to take us eventually back to the 1370-1380 level. At this point almost every man and his neighbor would be looking to ride the next wave down. It really is very hard to call right now as many indications are pointing to a slow motion crash unfolding but still stubborn divergences are occurring beneath the surface, and one senses that the short sellers are having it too easy.


How much lower are we going on the commercial banks?

Yesterday we closed at 60 which is a 50% retracement from the historic highs achieved on this index of aproximately 120.

Also interesting is the fact that since breaking down from the triangular or descending wedge pattern we have covered most of the height of the triangle to the downside.

Are we there yet? A symmetrical break down would take us to around 56 which is also close to where the 20 day volatility bands are pointing. So the guarded answer to the question just posed is - No but we are probably close.

The Bombay Sensex Index(^BSESN), part of the BRIC complex, shows a classic reversal pattern at critical lows but the intraday low today was above the intraday low from Wednesday’s session. One is clearly left with the sense that for traders on Monday all will depend on how the US markets perform today.

The euro appears to be setting up for an upside breakout above 1.58 on the cross rate with the dollar.

There is a very interesting fractal pattern emerging on the chart which strongly suggests that we could well laying the foundations for a move up and beyond 1.60

From a fundamental perspective there is the ECB decision next week and the market’s sense that it has got the Fed on the hook. Forex traders may well make the move that breaks down the equity markets but the previous high of 1.60 is now critical.

TRADE OPPORTUNITIES/SETUPS FOR FRIDAY JUNE 27, 2008



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

IXP  iShares S and P Global Telecommunications  

One of the largest proportionate volume moves yesterday was in the sector fund that tracks the S&P Global Telecommunications stocks. The volume was seven times the daily average pointing to fairly decisive action by some asset managers that could be exiting the sector.



AA  Alcoa Inc.  

Alcoa (AA) slipped below key moving average support yesterday. Industrial commodities have been moving down in this latest sell-off and the action highlights the significance of the failure candlestick that has been highlighted on the chart.



C  Citigroup Inc.  

I cannot help feeling that the market calls made by Goldman Sachs recently, including a short sell recommendation on Citigroup (admittedly as part of a pairs trade) are a little disingenuous on the one hand, and rather late in the day on the other. Citigroup (C) is struggling at multi-year lows and although there are certainly major writedowns ahead one has to wonder how much of this is already factored into the price.



LEH  Lehman Brothers Holdings Inc.  

Volume is drying up as Lehman Brothers sinks back towards new multi-year lows. Is this bank going out of business - the bears seem to be betting that it is but they really don’t know and would be very quick to cover on any snap back rally.



INTC  Intel Corporation  

The price action yesterday for Intel (INTC) reveals a breakdown from moving average support but the volume does not yet point to panic selling or capitulation.

Daily Form June 26, 2008

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
THURSDAY JUNE 26, 2008       06:25 ET

In the aftermath of the meeting of the eminent FOMC committee the statement that accompanied the unsurprising decision not to move rates provided nothing new for the markets. Now they still have to confront the same reality as before which is that, until there is technical evidence to the contrary, rallies back to resistance levels will be seen as opportunities to unload gains from short term long positions or to establish new short positions.

The Nasdaq Composite (^IXIC) will face exactly this challenge in the vicinity indicated on the chart.


The Brazilian Bovespa index (^BVSP) will also face a major hurdle as it attempts to climb back above the 20 and 50 day EMA’s which have almost intersected between 67,000 and 68,000.

In overnight trading in Asia the performance of the Hang Seng index (^HSI) will not be heartening for those sensing that the Chinese market may be trying to build a base. In the latter part of the trading session the Hang Seng gave back any intraday gains and closed more or less on the low for the day.

TRADE OPPORTUNITIES/SETUPS FOR THURSDAY JUNE 26, 2008



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

EWU  iShares MSCI United Kingdom Index  

Last week I discussed how the exchange traded sector fund,EWU, that reflects the MSCI index for the United Kingdom could provide the short leg in a pairs trade as against a more favored global market index. The fund has continued down and is now approaching the mid March low. A recent market analysis pointed out that the FTSE index is in many respects a poor barometer for the UK economy and domestic stocks because of its overweighting in terms of mining and energy based stocks which have side stepped the malaise that is gathering momentum in the home grown economy. The MSCI index for the UK better reflects the weakness of the domestic market.



DOG  Short Dow30 ProShares  

A number of readers of this commentary have expressed interest in the inverse tracker funds that are exchange traded. The fund called DOG tracks the Dow Jones Industrials but moves inversely to the index so the action of the last two sessions is one method of interpreting the likelihood that the DJIA is preparing to rally from current levels.



BA  Boeing Company The  

Regular readers may recall the bearish call that I made on Boeing (BA) in early June based on the various technical weakness highlighted on the chart. The pattern has gone on to reveal a further bear flag formation as part of a downward staircase pattern which is something I discuss in some detail in my book Long/Short Market Dynamics.



HON  Honeywell International  

A very similar story to the above could also be told in relation to the Honeywell (HON) chart.



SYNA  Synaptics Incorporated  

There is probably room for more gains before looking for an entry opportunity but Synpatics (SYNA) appears to be setting up for a breakdown from a bear flag pattern.

Daily Form June 25, 2008

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
WEDNESDAY JUNE 25, 2008       05:32 ET

The FOMC decision to be announced later today was yesterday being billed as the most important Fed decision for a very long time but the cynics will say - that’s what they say before every one. The highlight from yesterday’s session was the fact that the Dow Jones Industrials managed to penetrate on an intraday basis below the mid March low.

The S&P 500 (^SPC) has further to go as it closed almost 40 points or three percent above its closing low of 1276 from March 17th.

From a technical point of view it is difficult to find any obvious targets/support levels where we closed yesterday and the most that I am prepared to say at this juncture is that there should be support around 1270 and clear overhead resistance about 100 points above that at 1370.


On the S&P 400 Midcap index (^MID) which has been sliding slightly less sharply than the rest of the market there would be a potential bounce at 840 which represents the 38% retracement of the mid March low and the mid May high as well as marking the 200 day EMA.

The smaller cap stocks are now showing signs of technical weakness and attrition and worth monitoring today is evidence that confirms yesterday’s pick up in volume on IWM, the exchange traded proxy for the Russell 2000, as the index dropped below key support levels.

TRADE OPPORTUNITIES/SETUPS FOR WEDNESDAY JUNE 25, 2008



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

C  Citigroup Inc.  

An attempt to mount a rally in the financials yesterday faded as the day wore on. I have included an update on Citigroup (C) not, I hasten to add, because I am suggesting a long position but simply that the technical patterns of stock like this one could provide early clues as to where the market wants to go next.



NT  Nortel Networks Corporation (USA)  

Nortel Networks (NT) has a bull flag pattern.



PBW  PowerShares WilderHill Clean Energy  

The exchange traded fund for clean energy (PBW) dropped below key levels on at least twice the average daily volume.



DDM  Ultra Dow30 ProShares  

The Ultra Dow 30 fund provides two to one leverage on the upside for the Dow Jones Industrials.



SKF  UltraShort Financials ProShares ETF  

Another exchange traded fund that provides a leveraged exposure to a particular sector is SKF which is an inverse tracker of the financials with two to one leverage. This fund is also available for shorting which provides converse behavior (although not exactly in a symmetrical fashion to a 2:l long version of the fund).

Daily Form June 24, 2008

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
TUESDAY JUNE 24, 2008       06:06 ET

The technical condition of the investment banking sector (^XBD) is not encouraging as the chart pattern is one of a descending wedge which has often been a precursor to a downward breakout. It seemed feasible that certain part of the financial services area would mount a snap back rally from an oversold condition, and this can still not be discounted, but the formation on the chart below suggests that the investment banks may have to remain out of favor for some time before better days return.

Decisions being taken by some of the largest firms to jettison highly paid investment bankers is not taken lightly as these banks have had to pay substantial compensation to attract their intellectual capital. Letting such talent go reflects the moribund nature of the securitization business as well as other serious slowdowns in the sector’s earnings ability in the future.


One of the more interesting items of news yesterday was the admission by Goldman Sachs that it had made the wrong call on the financials and consumer discretionaries in the wake of the mid March liquidity scare. The bank has essentially issued a sell signal on both sectors and on cue many fund managers seem to be baling out as evidenced by the weakness in the exchange traded fund XLY.

For day trading short sellers though the risk/reward ratio at such depressed levels, where a snap back rally could be quite sharp, has to be weighed carefully.

Another victim of the gathering gloom about the state of consumer finances is seen in the chart for the S&P retail sector (^RLX) as it has dropped to the bottom of its 2008 range. We could be about to find whether the range bound price activity of the last six months is about to give way as the sector could be seeking out a lower floor for the range.

TRADE OPPORTUNITIES/SETUPS FOR TUESDAY JUNE 24, 2008



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

AMGN  Amgen Inc.  

Amgen (AMGN) has one of the most positive looking charts for the bulls.



DBRN  Dress Barn Inc.  

Dress Barn (DBRN) is one of the retailing stocks that displays a deteriorating technical picture that suggests that the intermediate outlook is for further weakness.



VRSN  VeriSign Inc.  

It would be worth monitoring Verisign (VRSN) over the near term as the early June peak was evidently not confirmed by encouraging volume and momentum characteristics.

Daily Form June 23, 2008

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
MONDAY JUNE 23, 2008       06:54 ET

After Friday’s sell-off and the continuing admission by the financial sector that there are yet further big write-downs ahead market sentiment is becoming very gloomy. Many are now expecting the key level on the S&P 500 of 1270 to be tested and many of those are expecting that it will not hold. This tends to stir the contrarian instincts and I would simply point out that the Nasdaq 100 (^NDX) still remains above its 200 day EMA. Even if that should break there is a long way down before the March low would be in jeopardy.


XLF is showing some early stage positive divergences on both the MACD and MFI charts as it has retreated to the March levels.

Along with many of the global indices the FTSE index is approaching the mid March low. What I find quite remarkable about the technical configuration of this index is the clearly symmetrical nature of the steep upward channel from the March low up to the mid May peak, the clear technical breakdown that has been marked by the arrow on the chart, which took place on May 23rd, followed by the steep downward channel since. In hindsight, which always enables 20/20 vision, this would have been one of the easiest indices to trade over the last few months.

Last week was a very profitable one if you were on the short side, not only in the US market but also in most other world markets where the geographical sector funds provide liquid short instruments for non-institutional investors. The EEM sector fund, discussed here recently, dropped out of a bear flag pattern and finished below a key level in Friday’s trading on twice the average daily volume.

TRADE OPPORTUNITIES/SETUPS FOR MONDAY JUNE 23, 2008



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

C  Citigroup Inc.  

The volume for Citigroup (C) has picked up as it comes back toward a re-test of the $18 level seen in March. This is one of the focus stocks for the next few sessions and I shall be watching for any evidence of a capitulation low to be in place for a tradable bounce.



INP  iPath MSCI India Index  

In addition to the testing of critical levels that is taking place in the more established world markets there have been several critical technical breakdowns in emerging markets, particularly the BRIC zone. The Bombay Sensex closed Monday’s session with another drop of almost two percent and is now almost certain to head down to 14,000 where there is some chart support. The INP sector fund provides exposure to the MSCI India index.



F  Ford Motor Company  

After Ford registered a text book example of the evening star candlestick pattern as highlighted on the chart it was suggested that further downside was to be expected in the intermediate term. We are getting there in more of a hurry than I expected thanks to downgrades by the ratings agencies.



MER  Merrill Lynch and Co. Inc.  

Merrill Lynch (MER) fell almost five percent on Friday and is very close to the low experienced on June 11th which itself was considerably below the March low. The MACD chart appears to be signaling a positive divergence or non confirmation on the committment behind the selling on Friday....but calling a bottom in the financials has been subject to error before.

Daily Form June 20, 1008

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
FRIDAY JUNE 20, 2008       05:55 ET

Yesterday was one of the most interesting in what has been an ongoing series of coordinated inter-market strategies between energy traders on the one hand and index futures traders on the other. The chart for the exchange traded SPY shows more vividly than the cash index the nature of the spinning top pattern which is often seen at inflection points.

Anticipating which way we will break in the short term at least is not my primary focus as a trader but the one thing which does stand out is the extremely low reading on the MFI chart which could suggest that the bears have already taken their best shot in the current maneuvers.


The Bovespa index in Brazil (^BVSP) has broken below the 50 day EMA and now faces a test at a fairly critical level of chart support.

Adding to the intrigue in the coordinated macro inter-market strategies was the announcement by the Chinese government that the prices on imported energy products were going to be hiked substantially with immediate effect. This would almost certainly have caught energy traders unawares and there could be further re-allocations as the impact on the sector is more fully digested.

The Oil Index (^XOI) responded to the development with a close below the 50 day EMA.

Two weeks ago I discussed the breakout in the cross rate between the Australian dollar and the Japanese yen. The area I have highlighted in yellow on the chart shows the reversal move that provided the first alert to the break above the 100 level as the high yielding currency strengthened against the yen.

In all cross rates there is a combination of strengthening of one currency against a basket of currencies and weakness of the other as much as a particular focus on the specific exchange rate for the pair. The general point that I have made previously is that this rate, often seen as a key carry trade pairing, can often be seen to peak at moments of inflection for global equities. I would suggest monitoring this rate in coming sessions as a surge in the rate with a rejection pattern - such as a shooting star formation - could be a tip off to increased equity market volatility.

TRADE OPPORTUNITIES/SETUPS FOR FRIDAY JUNE 20, 2008



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

ISIL  Intersil Corporation  

The chart for Intersil (ISIL) reveals momentum divergences on the move up to $29 in mid May and now the stock faces the hurdle of trying to back break above converged moving averages from below.



LVLT  Level 3 Communications  

I have mentioned the pattern Level 3 (LVLT) previously as there has been a retreat to the early June breakout and other evidence of chart support.



MRO  Marathon Oil Corporation  

Marathon Oil (MRO) has registered two consecutive doji star formations astride the 50 day EMA and there appears to be a lower high in place with negative momentum divergences.