Daily Form March 11, 2008

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
TUESDAY MARCH 11, 2008       04:08 ET

The S&P 500 (^SPC) has entered the critical zone where the January low is at risk and where quite plausibly it would only take the fall-out from another margin call or distress signals from an ailing financial intermediary to bring about a selling avalanche.

In general terms I feel more cautious than usual about the pattern analysis of individual securities at this point, precisely because the ongoing forced liquidations of hedge funds and even the proprietary trading desks of the large investment banks are predicated on sellers seeking out liquidity where they can find it with very little regard to the underlying technicals. I discuss this issue in some detail in my recent book Long/Short Market Dynamics in a chapter on the viciously circular relationship between liquidity crises and financial contagion.

I conjectured in yesterday’s commentary that some rally in the banking sector could present a swift surprise/reversal. The problems for banks and investment banks however seem to be endless and each day brings new margin calls and collateral markdowns.

The broker/dealer sector (XBD) is taking a disproportionate hit at the moment as financial instrument complexity is decidedly no longer the flavour du jour. Rumors were rampant yesterday that Bear Stearns (BSC) could be facing liquidity concerns and the stock (see below) dropped by 11% to multi-year lows.

Meanwhile Lehman Brothers (LEH) announced an across the board 5% reduction in its workforce and Goldman Sachs seems not to have found sufficient buying interest while it has being hovering at last August’s low.

The raw materials sector fund (XLB) is showing signs of weakness and industrial commodities were particularly under the hammer yesterday. Last week I showed the parabolic rise in platinum and suggested that bubble like behavior was emerging. Once again the reason behind the selling may have much to do with the fact that the more leveraged hedge funds are being cut off at the knees by margin calls from prime brokers.

The CBOE Volatility Index (VIX) has been moving up steadily but without the spike behavior that is associated with capitulation. As we face the 1260/70 level on the S&P 500 and are looking for traces of a double bottom it would be more persuasive if the technical price action was following on from an obvious instance of panic and cathartic like selling.


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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C  Citigroup Inc.  

The breakdown from the descending wedge patterns is starting to show up on more and more charts. Citigroup (C) dropped below $20 yesterday and looks precariously poised at levels that seem overdone but where there seems to be no relief from the ongoing negative news across the credit markets.

WB  Wachovia Corporation  

The chart for Wachovia Bank (WB), featured here last week as another instance of the descending wedge pattern, highlights the difficulties that the overall market is facing. It is very hard for the bulls to mount a rally, even when we are at such a critical level, when financials look as though they are hanging on by their fingertips.

BSC  The Bear Stearns Companies Inc.  

Bear Stearns (BSC) added to the woes yesterday in the financial sector with an eleven percent decline. Let’s hope that the CEO doesn’t overdo the denials that there is any liquidity problem facing the company.