Daily Form May 19, 2008

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
MONDAY MAY 19, 2008       06:09 ET

In previous commentaries I have pointed to the 1455-60 area as my intermediate term target on the S&P 500 index. The 1455 level, or thereabouts, represents a 62% retracement from the October 2007 high and the mid March low.

Where I feel much less confident is in anticipating whether we will get there without enduring a short term period of retrenchment or not. Certainly there are numerous technical divergences on individual charts to suggest that the recent rally looks over extended. On the other hand the bullish dynamics and the prevalence of still many skeptics could push this rally up to the 1455 target without such corrective behavior, and conceivably during the course of the week ahead.

One potential obstacle for the bulls this week will come on Tuesday morning with the release of the Producer Price Index (PPI) which, more than the CPI numbers that were published last week, could spook the Treasury market. Last week the 10 year Treasury note came within a whisker of the 4% yield level and this week we may see the first closes above this level during 2008.

The week ahead will see many of the indices having to tackle quite clear lines of overhead resistance. In many cases the area of potential price resistance coincides with the 200 day EMA. In particular the Russell 2000 index (^RUT) challenged the 740 level during the course of last week which exactly coincides with the 200 day EMA, and managed to close on Friday just above that level, registering a hanging man candlestick in the process.

Geographically based ETF’s offer some very fertile trading opportunities at present, enabling one to have exposure to different global markets without being subject to individual chart risk. Amongst the funds that are worth keeping on the radar this week are several in the emerging markets. EWZ allows exposure to the Brazilian market which at some point will need to take a rest, EEM is the sector that tracks the emerging markets in general. Amongst the Asian market funds, EWT which tracks the Taiwan market, could become vulnerable as it attempts to overcome last October’s highs.

The Ultra Short Midcap 400 fund (MZZ) provides an inverse leveraged play on the S&P 400 Midcap index which featured prominently in last week’s commentary for its almost parabolic ascent in recent weeks.


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

EPEX  Edge Petroleum Corp  

Last Wednesday I drew attention to Edge Petroleum (EPEX) which had fallen hard below two key moving averages. The remainder of the week saw a further plunge which would have returned more than ten percent from a short entry taken up on Wednesday’s open.

ERTS  Electronic Arts Inc.  

Electronic Arts (ERTS) broke through moving averages on substantial volume and looks vulnerable to further weakness.


At the end of last week we saw vindication for Tuesday’s comment that "Qualcomm (QCOM) could be preparing to breakout from a rising wedge pattern"

JDSU  JDS Uniphase Corporation  

I shall be monitoring JDS Uniphase (JDSU) during the week, probably later rather than sooner, for entry opportunities on the short side closer to $13.

BJS  BJ Services Company  

A similar line of reasoning to that just noticed for JDSU could be applied to the chart for BJ Services (BJS) which is nearer to a potential price rejection level near to $32.

MYL  Mylan Laboratories Inc.  

Mylan Labs (MYL) also has a bearish pullback pattern that will run into obvious resistance from the convergence of two moving averages.

URBN  Urban Outfitters Inc.  

Urban Outfitters (URBN) broke down technically on Friday and could be headed towards the 200 day EMA.