Daily Form February 1, 2008

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
FRIDAY FEBRUARY 1, 2008       07:05 ET

The 1380 level that was touched in Wednesday’s version of bouncy castle trading, proved to be both the target and hurdle that I cited in yesterday’s commentary. I shall save the reader from any speculation about what might happen in today’s session following the employment data, except to say that more price gymnastics will almost certainly be on the menu.

This is one of the most difficult trading environments that I can recall. The intraday reversals can play havoc with position trading and sabotages the normal money management techniques where both long and short positions can get taken out in the abrupt reversals. Being right about eventual price direction is not the challenge at the moment and accordingly I am wary about relying on normal pattern diagnostics.

With that in mind I would propose that all setups need to be weighed against the alternative strategy of simply standing aside while this very high risk environment persists.

The banking index (^BKX) has cleared the 50 day EMA hurdle and as the chart shows the downward trend line appears to have been broken. I feel uneasy that the banks could have turned so decisively and so transparently to market players. Notwithstanding the highly unusual Fed generosity it seems rather unpalatable that for a sector where problems are still pandemic we should be confronting such an obvious "V" shaped recovery.

Similar reasoning could be applied the investment banks as exemplified in the chart for XBD.


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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TWX  Time Warner Inc.  

Time Warner (TWX) has more headroom before it hits potential resistance at the 50 day EMA.

RSH  RadioShack Corporation  

Radio Shack (RSH) has rallied up to close at an obvious line of resistance.

ETN  Eaton Corporation  

In similar fashion to the chart for TWX, Eaton (ETN) has further to climb before major overhead resistance may halt the recovery.