Daily Form January 14, 2008

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
MONDAY JANUARY 14, 2008       05:11 ET

With more commentators and analysts now ready to cross the Rubicon and declare that the US economy is already in recession, last week was a rather enigmatic week for the broad market indices. On the one hand, Tuesday’s sell-off failed to gather momentum and the indices, as exemplified by the S&P 500 (^SPC) promptly reversed in Wednesday’s session. But perhaps more worryingly for the bulls and surprisingly, the very accommodating language from Fed chairman Bernanke which strongly tips the balance towards a fifty basis points easing later this month, failed to cause the expected scramble to cover by those aggressively short the overall market.

The triangular or pennant like pattern is yet again pointing towards indecision and hesitation and as usual this will inevitably be followed by another directional breakout. The key to this directional bias may become clearer this week as earnings, especially from the financial sector, will either vindicate those courageous fund managers that think they are buying at the bottom of the current cycle or bring forth even more pessimism about the state of play in the credit markets.

The oil index (^XOI) looks set to test a key chart level near to 1440 at which point some buying support would seem to be probable. Several short sales on individual oil/petroleum companies have been very rewarding recently, but a short covering rally could see these stocks bounce quite abruptly.

The financial services sector showed relative outperformance in the latter part of last week. Some buyers are being attracted to the sector but buying banks and credit guarantors at this stage is a high risk, and on an intraday basis a potentially high reward, strategy.


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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STJ  St. Jude Medical Inc.  

One of our long recommendations from last week, St Jude Medical (STJ) achieved our initial target in the mid $40’s and now could be poised to re-test the highs from August and September near to $48.

OI  Owens-Illinois Inc.  

Owens Illinois (OI) was another recent recommendation, this time on the short side, and the initial target was achieved as the stock dropped swiftly a week ago. During the latter part of last week a pullback unfolded and I would be looking again at the short side as the stock approaches $47.

PEP  PepsiCo Inc.  

The chart below for PepsiCo (PEP) shows some notable negative divergences.

HOG  Harley-Davidson Inc.  

Harley-Davidson (HOG) has an interesting evening star candlestick pattern at the bottom of the recent range and there could be further weakness ahead.

CVH  Coventry Health Care Inc.  

Coventry Health Care (CVH) faces a real challenge at $62. Historically this has proven to be a serious barrier but the chart pattern will keep me on the lookout for a break to all time highs this week.