Daily Form February 4, 2008

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
MONDAY FEBRUARY 4, 2008       04:31 ET

In the early part of Friday’s session, while traders and analysts digested a weaker than expected employment report, there was a continuation of the extremely erratic conditions seen during most of January. After the weak data was seen as lending even more support to the idea that fed funds are headed down perhaps towards 2% in a hurry, the market stabilized amidst what appears to be an emerging consensus of increasing optimism that the Fed is now on message and positioned where many institutions want it to be i.e. ensuring that the equity market is not left to the wolves. Significantly, a large drop in the VIX suggests that a corner may have been turned in sentiment during Friday’s trading.

The recent rather remarkable "V" shaped patterns on many charts reminds me of the patterns seen in the aftermath of last August’s tumult. Following the large short squeeze, particularly in the financial services area, that began in earnest on August 16, several large trading desks smelt the blood of proponents of the financial apocalypse fears and harnessed the short covering dynamics to propel the S&P 500 rapidly towards a new nominal high in early October. A characteristic of widespread short covering is the "V" formation that we are now seeing and this could continue for some time. If it is not accompanied by genuine accumulation by institutions and asset managers we almost certainly will be setting up again for the unsupportable divergences that emerged in the latter part of last year.

Many layers of resistance lie above last week’s closing price on the S&P 500 (^SPC) but the area around 1420 which coincides with chart support/resistance and the 50 day EMA seems like the near term target and hurdle.

The banking index (^BKX) continues its slightly unconvincing recovery pattern with another threshold to be faced in the region of 100-102.

The volume patterns for the exchange traded fund for the consumer discretionary sector, XLY, echoes the short covering scramble that can be seen in many of the financially sensitive stocks.

The homebuilding sector fund, XHB, has slightly more constructive money flow characteristics than those observed for XLY. The extreme pessimism that has confronted the sector for months suggests that the stocks had been completely sold down to panic levels. With the growing optimism that the Fed will rescue the US consumer from worst case doomsday scenarios the sector appears to have begun a long term recovery. Having said that I suspect that the easy money may have been made in the short term in the sector.


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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ETN  Eaton Corporation  

Friday’s recommendation on Eaton (ETN) yielded a four percent return for the session and the stock could still have further to climb before it encounters major overhead resistance.

NVDA  NVIDIA Corporation  

I would be targeting the $29.50 area for NVIDIA Corporation (NVDA).

CPKI  California Pizza Kitchen  

California Pizza Kitchen (CPKI) is yet another stock that has made a striking recovery. The volume has not been impressive since the plunge that occurred on January 16th and I would be looking for good entry possibilities on the short side.

EBAY  eBay Inc.  

eBay had a good session on Friday with a 7% increase and now appears to have turned the corner as far as the lackluster money flow that had been in place for several months. The $32 level would be my near term target.