Daily Form May 8, 2008

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
THURSDAY MAY 8, 2008       06:02 ET

The US equity indices, many having reached upwards to areas of clear resistance, succumbed to bouts of selling in yesterday’s session. There is a growing realization that the easy money may now have been made in the recovery since the March lows. While this does not persuade me to take a bearish stance it will make me more attentive to wanting to see signs that volume and money flow can more expansive during the next efforts by the bulls to take us beyond the current layers of chart resistance.

The chart for the Dow Jones Industrials (^DJI) provides a good illustration of the manner in which many indices now have to move beyond the attraction of the 200 day EMA.

Another chart which illustrates the hurdles that need to be overcome if the rally is to make further progress is the weekly chart for the Dow Jones Transportation index (^DJT). Quietly and steadily this index has been climbing back towards the 5500 level which marks the historic high from July 2007. The index fell back 3% yesterday but the chart suggests that there is further reason to suspect that traders will maintain their efforts to challenge the previous all time high.

It would not be surprising for the S&P 500 (^SPC) to retreat to the 1370/1380 level which lies between the 20 and 50 day EMA’s. Interestingly the 20 week EMA sits at exactly 1380.


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.
For full details on time horizons, risk management and hedging techniques please visit http://www.tradewithform.com

HOV  Hovnanian Enterprises  

The chart for homebuilder Hovnanian Enterprises (HOV) also reveals the difficulties that many stocks are having in moving above their respective 200 day EMA’s. The stock has tracked the green line which marks this moving average and is now looking, as though, at least in the near term, it is about to fail at the hurdle. The momentum has been fading and the MFI evidence suggests that institutions are not accumulating at this stage.

USG  USG Corporation  

The chart for USG Corporation features a shooting star candlestick from yesterday where the upper tail almost tagged the 200 day EMA. Yet again the chart illustrates the inability of many stocks to sustain closes above this key moving average. The bearish pullback pattern and the break below two other moving averages will have me looking for an entry opportunity on the short side in coming sessions.