Daily Form March 10, 2008

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
MONDAY MARCH 10, 2008       05:10 ET

The critical levels on the S&P 500 which I discussed in last week’s commentary were almost challenged and, on Friday, we did come tantalizingly close to a fundamental support level.

Looking back at what I wrote last weekend I feel that it seems even more appropriate today and will repeat the point verbatim - “The 1260-1280 level on the S&P 500 (^SPC) is a critical level and, in addition to marking the lows in January, there are several other technical patterns of long term chart support/resistance that suggest that this is a key level that needs to hold to prevent a rout. If fund managers do not see the level around 1260 as a value area in coming sessions then the pace of liquidations could really cause a breakdown and this would raise a much more ominously bearish shadow over the future direction.”

Friday’s intraday low on the S&P 500 touched 1282.43 and that leaves us just one percent above the 1270.05 that we reached on January 23rd. It would be quite extraordinary for us not to re-test that level in coming sessions and traders and pundits across the globe will be scrutinizing the technical condition of the market when we get there, which could be as soon today’s session.

The presence of several spinning top candlesticks, especially amongst the financials, highlights the fact that we are at a major inflection point and a roller coaster ride in the early going is to be expected.

The KBW Banking index (^BKX) is now down 30% since its rally in late September/early October when the cheerleaders were trying to ring fence the problems in the credit markets as one that only affected the sub-prime mortgage sector. With prestigious names such as KKR and Carlyle Financial missing payments on their commitments, hedge funds such as London based Peloton Partners seeing $2 billion evaporate overnight, and even sovereign bonds of Italy being sold off in a panic, there is a suggestion that a vicious downward spiral is now under way where margin calls leads to further selling leading to declining collateral/asset prices which in turn leads to further margin calls etc.

The obvious question that many (too many) are asking is - are we headed for a plunge? The possible salvation that I see for the broader market, in the near term, is that we may have reached a level where the persistent selling of the financials and banks may not only have discounted fully a major recession but something more like a financial meltdown. I am tempted to suggest that the “smart money” may now be getting ready, as in previous crises, to buy on the bullets, or in the current scenario, buy when all of the weekend news reports are full of gloom and doom about a financial Armageddon. If we do get a rally in the financials, which I suspect is imminent, it will certainly take the whole market up rapidly as we saw last August. Whether the “smart money” will have called an exact bottom, longer term, in the banks, is much less certain.

In Asian trading the Nikkei 225 (^N225) fell back towards the 12,500 level and very close to its January lows whereas the Hang Seng Index is showing a divergence with an almost one percent rise.

As I am writing this Germany’s Dax index is approaching its January low and will, I suspect, hover in that vicinity until it becomes clearer how the US markets will tilt when they open later.


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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EOG  EOG Resources Inc.  

EOG Resources (EOG) has a hybrid pennant/bull flag pattern and looks to be headed higher.

GG  Goldcorp Inc. (USA)  

Goldcorp (GG) has encountered resistance at the $44 level but I would not be surprised to see another buying spree take the mining stocks higher.

LTD  Limited Brands Inc.  

Limited Brands (LTD) broke down to a multi-year low on Friday and the early 2003 lows that are evident on the weekly chart could well be a target in the intermediate term.

GY  GenCorp Inc.  

Gencorp (GY) has a bearish flag forming and the volume pattern is supportive of a short recommendation in the days ahead.

NLY  Annaly Capital Management Inc.  

Annaly Capital Management (NLY) which is one of many highly volatile financial intermediaries that should be expected to move abruptly again this week. If a short covering rally is triggered from buying amongst the banks and financials this stock will cover a lot of ground very rapidly.

DBRN  Dress Barn Inc.  

Dress Barn (DBRN) has a bullish flag pattern and I would favor the long side.