Daily Form February 6, 2008

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
WEDNESDAY FEBRUARY 6, 2008       06:24 ET

The ISM survey showing a precipitous drop in the service sector provided an added impetus and fresh catalyst to the selling that emerged during Monday’s retreat from pronounced areas of resistance that I discussed yesterday. One of the best instances of the pattern is for the S&P 400 Micap index (^MID) which turned exactly at the 50 day EMA and in the support region of the August and November lows which has now turned into a barrier on the upside.

Asian markets took their cue from the sell off in the US and the Nikkei and Hang Seng both experienced sharp falls. With Chinese New Year celebrations keeping the Hang Seng and Shanghai exchanges closed for the rest of the week there was undoubtedly some position squaring but the Hang Seng chart reveals a key reversal at the 200 day EMA.

Intriguingly the European markets have not seen much follow through from the sell-off even though the US markets continued to erode after the European exchanges were closing around lunchtime yesterday in New York. Based upon the muted reaction in London, Paris and Frankfurt this morning we could be setting up for another short squeeze when the US opens later.

The febrile, whipsaw action continues to pose real obstacles to position traders and is keeping a lid on my own trading activities.

Many stocks in the financial services sector have dropped back quite sharply this week and the investment banks were especially weak in yesterday’s trading. The broker/dealer index (^XBD) dropped by more than five percent with similar magnitude drops in GS, LEH (see below), MER and especially BSC which lost 7.5%.

As the chart suggests the very recent breakout above the descending trendline would undoubtedly have ensnared many breakout players. The abrupt reversal from what, at least at present must be categorized as a false breakout, is likely behind the rather indiscriminate dumping of the large investment banks yesterday.

On January 22nd the Nikkei 225 (^N225) closed just above 12500 whereupon, along with other global indices, it climbed quickly but halted at the steeply descending 20 day EMA. In overnight trading the index has now slipped back towards 13000 and it seems likely that the January 22nd low may need re-testing. I have shown previously why I think that this index could be headed to a more critical testing at the 12000 level but also would point out that 14500 will be a major obstacle on the upside.

The Nikkei has been one of the easier global indices to trade with more trend like behavior and a more or less uniformly bearish tone since last October.


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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WFC  Wells Fargo and Company  

Wells Fargo (WFC) continued its slide yesterday but as it approaches key moving averages there is tradable bounce potential.

LEH  Lehman Brothers Holdings Inc.  

Lehman Brothers (LEH) has moved within a clearly defined range since last August and despite yesterday’s six percent drop the chart highlights the stock’s essentially cyclical and range bound behavior.

ANN  AnnTaylor Stores Corp.  

Ann Taylor’s chart (ANN) looks constructive on the long side but with the ubiquitous whipsaws there is a strong risk of getting taken out by your stops before the expected upside behavior re-asserts itself.