Daily Form January 9, 2008

TRADE WITH FORM
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.

TRADE OPPORTUNITIES/SETUPS FOR WEDNESDAY JANUARY 9, 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

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.

Daily Form January 7, 2008

TRADE WITH FORM
Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
MONDAY JANUARY 7, 2008       06:40 ET

Friday’s data, much weaker than anticipated, is very troubling for the intermediate outlook for US equities. Even the usual cheerleaders and bullish spin-meisters were unable to find a silver lining. The negative divergences and ominous patterns that have been evident for some time finally gave way to the kind of persistent selling that suggest we may finally have broken out of the trading range that contained prices during the second half of 2007.

The weekly chart for the Dow Jones Industrials (^DJI) shows that we are entering an "area" of probable support but this support zone is not well defined and has quite wide boundaries that will now need to be tested.

Although I believe that we are headed lower, I would be careful about getting too enthusiastic on the short side as large bounces can often follow in the wake of the downside action we saw last week. A period of erratic whipsaw action is the most likely scenario in coming sessions as traders explore just where real support kicks in. The intraday of 12455 from mid August seems to be on the radar this week and I would not be surprised to see spikes even further down towards 12000. This is a good market for the intraday trading style but more treacherous for position traders.


As I discussed on Friday the tone to the market is often best understood by examining the small and midcap indices rather than focusing exclusively on the more widely followed banner indices. I have included a weekly chart of the S&P 400 Midcap index (^MID) as it shows, once again, that a key support level is nearby but that it also has a series of layers down to the 780 level.

The small caps as reflected in the Russell 2000 (^RUT) index sank by 3.1% and sank below the critical 740 level. There is some minor support near to Friday’s close at 720 but it is highly probable that this index will be testing more fundamental support at the 680 level during this quarter.

Stepping back to get a longer term perspective on where we’re headed the monthly chart for the retail sector fund, RTH, looks grim. One could quite plausibly make the case, just based on this sector, that the US economy is now embarking on a recessionary path in which we have moved beyond a normal correction and are carving our a new bear market. So is the bull market in US equities that began in 2003 over? Readers may forgive me if I do not answer this question head on but I would suggest that one very useful place to look for clues as to how the question can be answered is in the Treasury market which we should turn to next.

Yields on Treasuries plunged last week but the long term weekly chart below shows that we now have a rather symmetrical and cyclical double top/double bottom pattern to decipher. If we are witnessing the demise of the bull market that began in early 2003 then we should be looking in the weeks ahead for a breakdown in yields towards 3.5% and even lower, as opposed to another cyclical bottoming pattern.

TRADE OPPORTUNITIES/SETUPS FOR MONDAY JANUARY 7, 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

PANL  Universal Display Corp.  

Universal Display (PANL) has retreated to a level of potential support/resistance near to $20.



ELON  Echelon Corporation  

Echelon Corporation (ELON) has a pullback pattern which would allow entry near to all three moving averages.



GMKT  Gmarket Inc.  

GMarket (GMKT) has an almost orthodox Evening star candlestick pattern which is quite reliably bearish.



JEC  Jacobs Engineering Group  

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 look for a retreat to the 50 day EMA just below $90 as a first target.