Daily Form January 31, 2008

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
THURSDAY JANUARY 31, 2008       06:02 ET

Day traders were treated to a very sharp late reversal in yesterday’s FOMC decision dominated session. Mr Bernanke and his committee delivered the 50 basis points reduction to the fed funds rate that the markets were set up to expect (along with 50 bps off the discount rate as well), but after a sharp upward spike immediately following the announcement, broad based selling emerged to take the market down in a big hurry in the last hour of trading. The late sell-off was attributed to news reports that a monoline insurer was about to be downgraded by the ratings agencies but this seems suspect as it should not have been such a surprise to traders as it has been subject to wide speculation for some time. Could it be another instance of how getting what you wish for is a mixed blessing?

As the long upper shadow reveals the S&P 500 (^SPC) turned around almost exactly at the 1380 level which will now become a significant target and hurdle in the near term.

Within nine days short term rates have come down by 125 basis points and there is reason to expect even more in the not too distant future. Clearly the Fed governors are anxious to avoid any suggestion that they have been asleep at the wheel. From a credibility point of view though, one is left with the uneasy feeling that it has been the gyrations of markets as well as the tactics of trading desks that has scared them into their eye catching generosity.

Yields on the ten year Treasury note moved up yesterday and, as suggested last week, I would expect a test of 3.8% in short order. The steepening of the yield curve which accompanied the FOMC decision should be constructive for banks in their attempts to re-build their balance sheets but it also has more sinister reflationary implications. Asset allocators will be watching the yield curve carefully and any noticeable reticence to load up on long term Treasuries, possibly associated with dollar concerns, would pose even more challenges to US policy makers.

The gold and silver index (^XAU) is carving out a constructive looking pattern at it remains poised at potential breakout levels.


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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MON  Monsanto Company  

Monsanto (MON) registered a striking doji/spinning top formation and looks vulnerable following its recent pullback.

CYMI  Cymer Inc.  

Discussed here on Monday, CYMI rewarded in a big way on the short side as a result of yesterday’s plunge.

WFC  Wells Fargo and Company  

Wells Fargo (WFC) has been in the vanguard of the recovery amongst the money center banks but, as the doji star at the 200 day EMA pattern suggests, a consolidation period may be imminent.

CCI  Crown Castle International Corp  

Crown Castle International (CCI) faces several layers of resistance.

MW  Men"s Wearhouse  

Men’s Wearhouse (MW) has been on the watch list this week for signs that the pullback pattern is running into resistance and the pattern certainly fulfils the requirements for the bear flag template.