Daily Form July 31, 2008

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
THURSDAY JULY 31, 2008       07:30 ET

The annotations included below on the daily chart for the S&P 500 ($SPX) indicates that the 1320 area is a viable target in coming sessions. Attainment of this key level will motivate the growing cadre of bulls and could provide an opportunity for the bears to move off the sidelines and flex their muscles again.


The hourly chart for the Euro shows how we broke down below the $1.56 level yesterday and validated the prognosis from last week’s commentary. In today’s trading the $1.57 level should be a likely target and this might also be considered a fair value position prior to tomorrow’s key economic data.

Brazilian stocks, as captured in the sector fund, EWZ, staged a comeback rally yesterday following several weeks of sliding prices. The positive MACD divergence suggests that there could be sufficient momentum to take us back through the 50 day EMA and back towards the $90 level.

TRADE OPPORTUNITIES/SETUPS FOR THURSDAY JULY 31, 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

DUG  UltraShort Oil and Gas ProShares  

The Ultra Short Oil and Gas sector fund, DUG, has proven to be very profitable on the long side recently but as suggested here last week there is a definite technical hurdle to overcome at the 200 day EMA which is just above $36.



GILD  Gilead Sciences Inc.  

Gilead Sciences (GILD) faces a chart hurdle at $54.

Daily Form July 30, 2008

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
WEDNESDAY JULY 30, 2008       04:26 ET

Following on from Monday’s low volume sell-off the markets reversed yesterday and mounted a sizable rally with slightly more substantial volume. What is most striking about the asset rotation strategies that are currently being implemented is the rapid alternation between sessions when the financials are pummeled only to be followed within hours with manic short covering. Yesterday we saw a coordinated strategy, inspired by the boldness of Merrill Lynch’s decision to effectively establish a benchmark valuation for the CDO "toxic waste", in which oil, the euro and some industrials were sold and the banks, especially the investment banks surged ahead.

Volume was not decisively bullish, except in some of the financials, and the S&P 500 (^SPC) still has to confront an important resistance level at 1275. It may be that the market will now remain cautious ahead of Friday’s employment data but even if we see a rally continuation there will be a key test around 1320.


Last Friday’s discussion of the likelihood that the British pound was approaching an inflection point as it made one more attempt to break above 1.99 was confirmed in yesterday’s trading. The hourly chart for the last several sessions reveals the failure at the descending trend-line through the highs and suggests that sterling appears to have registered an intermediate term high.

QQQQ has been moving sideways in recent sessions and the volume chart reveals that yesterday’s upward move was still sub par in terms of volume. While the financials continue to gyrate the bullish case for equities continues to be made by the small cap Russell 2000 index and, if there is a decent rally ahead, one would want to see some price and volume strength amongst the Nasdaq 100 stocks.

TRADE OPPORTUNITIES/SETUPS FOR WEDNESDAY JULY 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

SMH  Semiconductor HLDRs Tr ML  

There are positive divergences on the daily chart for SMH, the exchange traded fund for the semiconductors.



EBAY  eBay Inc.  

EBAY has been pulling back, following the recent plunge, and could find it difficult to make further progress as previous chart support could now become a resistance threshold.

Daily Form July 29, 2008

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
TUESDAY JULY 29, 2008       07:09 ET

In a low volume session the sell-off gained momentum as there seemed to be an absence of both new buying and short covering to support prices. The Dow Jones Industrials (^DJI) lost more than two percent and all of the broad indices suffered as financials came under renewed pressure.

As can be seen below on the daily chart the index is in the middle of the important zone between the 38% and 50% retracement of the Oct 2007 high and the March 2008 low. The move down in early July took us below the 10750 level intraday but one senses that a more thorough testing could now be on the horizon.


The rally in the financials has fizzled and the investment banks (^XBD) stalled exactly where the downward trendline suggested they would. The bulls may try to get mileage today from the notion that Merrill Lynch’s (MER) eye watering write- downs represent a turning point etc. but this story has been used quite a lot over the last few months and, apart from short term trading profits, it has not been profitable for institutions that believe that the banks are a compelling buy at these depressed levels.

Mentioned here last week and also on CNBC Europe last Friday, the exchange traded sector fund that comprises several key Russian equities, RSX, has continued its decline. The early 2008 lows are back in play and could provide some support but given the deteriorating fundamentals and increased political risk this geographical sector is becoming less attractive to hedge funds.

TRADE OPPORTUNITIES/SETUPS FOR TUESDAY JULY 29, 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

TSM  Taiwan Semiconductor Mfg. Co. Ltd. (ADR)  

Even though Taiwan Semiconductor (TSM) dropped below its 200 day EMA in yesterday’s trading the chart pattern appears constructive from a money flow perspective.



PLCM  Polycom Inc  

Polycom (PLCM) has pulled back since the large down gap move in mid July and should encounter renewed selling in the region between $23 and $24.



ERES  eResearch Technology Inc  

The $15.50 area should provide a strong hurdle for eResearch Technology (ERES).

Daily Form July 25, 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 JULY 25, 2008       07:43 ET

The shooting stars on many indices noted in yesterday’s commentary near to chart resistance levels tipped us off to the overhead supply concerns mentioned. The Russell 2000 (^RUT) turned around almost exactly on cue and headed south in a broad based sell-off. There was no real pick up in volume on the downside and the technical damage to the recent rally seems fairly restricted.

To return to a topic that I have discussed several times, it is the relative out-performance of small cap indices since the October 2007 peak which distinguishes the bear market episode that we have seen evolving. What this suggests is that the larger caps which provide the greater liquidity, not only in the underlying constituent stocks, but also in the very actively traded derivatives and futures contracts, have been the preferred vehicle for the bearish camp to use. This highlights the major role now played by hedge funds using macro cross-asset strategies and in turn underlines that much of the downward price action has been via index linked short selling rather than the liquidation of holdings by long only funds.


The relative performance chart below underlines the manner in which the larger cap indices were in the vanguard of the decline in early July. Taking March 10, 2008 as the base-line for the chart, the S&P 500 (^SPC) and the DJIA are still below those mid March levels whilst the Russell 2000 is nine percent ahead even following yesterday’s close and the Nasdaq Composite Index (^IXIC) has managed a gain of 5%.

My contention is that if we are to see a second, perhaps more brutal leg to this bear market sell-off, it will be reflected in broad based liquidation of the portfolios of long only fund managers and that this will have to manifest itself in visible weakness in the Russell 2000 and Nasdaq Composite indices.

In European trading on Friday morning the Euro is staging something of a rebound against the dollar. The chart below however shows that a key trend-line has been violated during the course of this week.

Sterling had a poor session on all the major crosses in Thursday’s session but is staging a rather abrupt turnaround in Friday’s session. As revealed in yesterday’s chart which can be reviewed at the TradeWithForm Archive there is a succession of lower highs visible on the hourly chart for the British pound and the region around $2.00 now could act as a serious obstacle.

TRADE OPPORTUNITIES/SETUPS FOR FRIDAY JULY 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

XLV  Health Care Select Sector SPDR  

Earlier this week I noted the constructive chart pattern for the pharmaceuticals and similar chart formations are appearing in the health care sector. The sector fund, XLV, has an even more plausible case of the cup and handle pattern that can be a precursor to an upward breakout.



RSX  Market Vectors Russia ETF  

The sector fund for Russian equities (RSX) had been straddling the 200 day EMA for several sessions waiting for direction and it came in yesterday’s session. This market which is largely reliant on commodity based corporations is beginning to lose its appeal to the large hedge fund community that had been quietly stacking up gains in this market.

In a related context the Canadian stock market as reflected in the sector fund, EWC, is also suffering disproportionately from weakness in the energy sector.



STJ  St. Jude Medical Inc.  

The chart for St Jude Medical (STJ) depicts what may be in store for the health care sector more generally. The gap up move was preceded by the similar cup with handle pattern and now the pullback pattern presents an attractive risk/reward proposition on the long side.

Daily Form July 24, 2008

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
THURSDAY JULY 24, 2008       05:33 ET

Shooting star candlesticks are starting to appear on some of the key US indices and sector funds suggesting that the recent rally is running into some overhead supply. The intermediate term target for the Russell 2000 (^RUT) is 740 but there is chart resistance between 720 and 740.


The Euro continues its descent in European trading on Thursday morning as it failed to mount a snap back rally during yesterday’s session. Targets below $1.56 are now realizable this week but the main story this morning is the drop of the British pound. It is notably weaker on all the significant cross rates, particularly against the Euro but also against the dollar.

The proximate fundamental factor cited is a very weak retail sales report released Thursday morning, but the hourly chart below of the GBP/USD cross rate shows a technically bearish pattern. As dollar strength seems to be gathering momentum the longer term forecast for sterling against the dollar could see rates moving back towards $1.85.

As anticipated in Monday’s column the Dow Jones Utilities (^DJU) is vulnerable as long term interest rates continue to move higher. Discussed below is an ETF that provides exposure on the short side to the sector.

TRADE OPPORTUNITIES/SETUPS FOR THURSDAY JULY 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

XLU  Utilities Select Sector SPDR  

The chart for XLU illustrates the mini bear flag pattern that preceded yesterday’s 2.4% drop and a price target of $37 is feasible in coming sessions.



XOP  SPDR S and P Oil And Gas Exploration and Prod   

XOP, the exchange traded fund that tracks oil and gas exploration has performed well on the short side since my recent recommendation. A downward staircase/waterfall pattern is now manifesting itself which indicates broad based distribution.



NOK  Nokia Corporation (ADR)  

Nokia (NOK) has retreated to potential support since the large upward gap move on July 17th and the volume on the pullback has been subdued.



INFY  Infosys Technologies Limited  

Infosys Technologies (INFY) looks vulnerable and short entry opportunities above $42 would be worth considering.

Daily Form July 23, 2008

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
WEDNESDAY JULY 23, 2008       06:25 ET

Asset re-allocation decisions are inspiring tectonic shifts in the inter-market strategies being followed by the large hedge funds and trading desks. Equities, and specifically financials are becoming the recipients of capital flows that are fleeing a whole range of commodities and the forex market yesterday tipped us off to a significant re-thinking of dollar direction.

The hourly chart for the Euro/USD shows how during midday trading in New York yesterday selling hit the Euro at the 1.5930 level and this lead to a quick drop down to the 1.5780 area. The decline has extended into European trading this morning.

If the Euro loses its grip at the 1.5840 level on any rebound, this could send us down to the bottom of the longer term trading range between 1.55 and 1.56. The implication here is that further downside in the Euro would suggest that the rally in equities and the exodus from the energy sector and other commodities could have further to run.


The Russell 2000 (^RUT) outpaced the rest of the market yesterday with a 2.8% gain. Price action over the last two weeks has validated the early warning hypothesis advanced here that when the index bounced at the 660 level this was a precursor to a turning of the tide for larger cap stocks as well. The extent of the recovery in the financials has been more dramatic than many were expecting (including me) and serves to highlight just how much of a doomsday scenario was being discounted earlier in July.

Large drops in the CBOE Volatility Index (VIX), including yesterday’s drop below the 200 day EMA, underlines the remarkable dissipation of fear that has taken place in the last week.

TRADE OPPORTUNITIES/SETUPS FOR WEDNESDAY JULY 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

DBA  PowerShares DB Agriculture  

DBA, an exchange traded fund which tracks agricultural commodities, has seen a precipitous descent but is reaching an area where some support may arise at the 200 day EMA.



EPEX  Edge Petroleum Corp  

The chart for Edge Petroleum (EPEX) reveals a bullish flag pattern in the making, but the failure in early July after the extended rising channel that preceded it suggests that any upward progress may be short lived.

Daily Form July 22, 2008

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
TUESDAY JULY 22, 2008       06:11 ET

The Dow Jones Industrials (^DJI) is currently in a zone between the 50% and the 38% retracement of the March 2003-October 2007 swing high/low. Last week the index sank below the 10800 level intraday (A) and, as it now appears, this may have marked an important intermediate term low. In yesterday’s trading the index found resistance at the 11650 level (B) which not only marks the 38% retracement level but also the region of the mid March lows as well.

Overall breadth is improving although the degree of short covering in certain sectors of the market, resulting in some spectacular gains over the last week, may be partially obscuring the fact that there has been a shift to more positive overall dynamics for equities.


The Dow Jones Utilities (^DJU) looks to be one of the least technically favorable sectors of the market at present. A bear flag is emerging on the daily chart and there will be stiff overhead resistance from the intersection of all three moving averages in the region of 510.

The Amex Pharmaceutical Index (^DRG) has a constructive cup and handle pattern and if the index can break above the horizontal resistance line at 310 marked on the chart, which also more or less coincides with the 200 day EMA, this sector could see much higher prices ahead.

TRADE OPPORTUNITIES/SETUPS FOR TUESDAY JULY 22, 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

RKH  Regional Bank HOLDRS  

The exchange traded fund for the regional banks has been one of the main beneficiaries of the febrile short covering in the financial sector. The fund has gained more than 25% in the last week but is now entering a chart area where those who have been squeezing the shorts may decide to pause and consolidate.



FNM  Fannie Mae  

One of the most extraordinary charts is for Fannie Mae (FNM) which yesterday registered a shooting star after hitting resistance in the vicinity of the mid March low. This stock has doubled in the last week but the rather counter intuitive nature of the maths belies the fact that this stock is still trading at only 20% of its all time highest close.

I prefer to admire the chart rather than stake any trading capital in trying to guess which way this goes next.



XLF  Financial Select Sector SPDR  

XLF has gained 20% in the last week but the short covering may now take a pause at an area of upside resistance.



FRX  Forest Laboratories Inc.  

One of the better looking charts on the long side is for Forest Labs (FRX) where the pattern echoes the formation seen on the Pharmaceutical index.

Daily Form July 21, 2008

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
MONDAY JULY 21, 2008       07:01 ET

Reviewing charts this weekend shows that many asset classes are at key levels and one suspects that this coming week could clarify some of the market’s intentions regarding the numerous economic and financial cross currents.

One of the most pertinent charts is for commodities in general, as represented by the Jim Rogers Commodity Index (^RCT). Friday’s close put us just below the trend-line through lows since the turn of the year and also below the 20 and 50 day EMA. If the hard asset enthusiasts are not ready to throw in the towel we are now at levels where one would expect to see some broad buying support for certain commodities. On specifics the Amex Natural Gas Index (^XNG) achieved the 625 level discussed here more than a week ago in Friday’s trading.


Asian trading on Monday morning brought divergent performances from two barometer indices. The Nikkei 225 failed to make progress despite the positive tone to the latter part of last week in the US, whereas the Hang Seng (^HSI) managed to move ahead by 3%.

The doji star closing pattern on the Hong Kong index chart shows a violation of the recent downward trend-line which also tracks the 20 day moving average. Taking a longer term perspective it would seem that the longer lasting trendline which coincides closely with the 200 day EMA at around 24000 will provide a major hurdle as we approach the Beijing Olympics.

The FTSE 100 could find that the support level near 5400 which was violated on July 11th’s sell off may now pose a challenge to further recovery in the near term.

The broker/dealer sector has snapped back strongly as short covering gathers momentum amongst the financials. As suggested here recently the fundamentals for the investment bankers are changing with fewer opportunities for "cutting edge" financial technology and I would expect a re-evaluation of upside potential from some investors that have grown accustomed to lucrative margins for all of the big players in the sector.

TRADE OPPORTUNITIES/SETUPS FOR MONDAY JULY 21, 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

FXE  Currency Shares Euro  

The Euro/USD cross rate is another market which is sitting at a key level. Reviewing the chart below there is a case to be made that last week’s shooting star formation at the $1.60 could represent a double top failure pattern. The retreat from the most recent attempt to hurdle the $1.60 has been subdued unlike the drop that followed the attempt back in April. If the euro remains above $1.58 in the near term, in European trading Monday it remains above $1.59, I would suggest that odds favor another effort to seek out higher levels.



IYM  iShares Dow Jones US Basic Materials  

The industrial materials sector is experiencing congestion at the 200 day EMA and the rather pronounced triangular pattern suggests that a directional breakout is imminent.



DUG  UltraShort Oil and Gas ProShares  

The long position in the Ultra Short Oil and Gas sector fund, DUG, has proven to be very profitable but the exit target which was set near to the 200 day EMA was met in last Thursday’s session. The clear break out from the downtrend may turn out, at least in the near term, to have been a trap for those seeking large positional bets on a decline in the energy complex (this is an inverse fund) but there is a definite technical hurdle to overcome at $36 on this chart.

One of the advantages of this sector fund is that it amalgamates prices across two key commodities and allows one to have a view of energy prices rather than separate view of oil and natural gas.



SHW  Sherwin-Williams Company  

In comments on July 10th I noted that Sherwin Williams (SHW) along with most stocks had been experiencing substantial whipsaws but that the positive technical pattern was still intact. Late last week the stock surged and would have rewarded more than 12% since recommended.