Daily Form May 13, 2008

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
TUESDAY MAY 13, 2008       03:19 ET

The action in the US equity market yesterday was more uniformly positive than I was expecting. We did not see a robust testing of the 1380 level on the S&P 500 that traders might have been tempted to tackle, but instead most indices made good upward progress.

One of the better performance was seen in the Russell 2000 (^RUT) which moved up 1.8% and registered its highest close since early January. The index has to surpass the intraday high from May 2nd but faces its real challenge around the 740 level which coincides with the 200 day EMA. As noted previously it would be more reassuring for the rally continuation argument if we were to see more volume coming into the market when these key threshold levels are challenged.

The weekly chart for the Volatility Index (^VIX) shows quite clearly how traders are continuing to set aside their concerns with market risk and the associated implied volatility which were so prevalent from the summer of 2007 to late March of 2008.

Yesterday’s reading below 18 was the lowest value recorded this year and also coincides with the 200 week EMA.

In yesterday’s commmentary we reviewed several energy related charts where there is evidence that the momentum is begining to wane as prices are returning to, or attaining, historically high levels. The chart for the exchange traded fund, OIH, for the oil services sector, also is showing some indications of a possible intermediate term topping pattern.

With charts like the one below I prefer to stand aside until there is more evidence that a tradable correction is emerging. In pointing to the kinds of negative divergences that are seen on charts of sectors that have been showing relative strength for prolonged periods my intention is more to raise questions about being on the long side and suggest that the pattern should be closely observed for possible short entry opportunities in coming sessions.


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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PCP  Precision Castparts Corp.  

Precision Castparts (PCP) has a bullish flag pattern with the 200 day EMA likley to provide a support in the developing pullback phase.

SDTH  Shengda Tech Inc.  

Shengda Techh (SDTH) broke away from key moving averages on heavy volume and the momentum should result in further gains.

PLCM  Polycom Inc  

Polycom (PLCM) has moved up in a steep pullback channel since the plunge in mid April but should now encounter strong resistance.


Qualcomm (QCOM) could be preparing to breakout from a rising wedge pattern.