Daily Form May 22, 2008


Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
THURSDAY MAY 22, 2008       06:34 ET

The S&P 400 Midcap index (^MID) fulfilled its target close to 880 and almost exactly on cue it has hit turbulence. The question, of course, for some fund managers who have been accumulating recently is whether they believe that bumpy ride is going to be relatively short lived or whether they might decide to put the buying spree that has been in evidence since late March on hold, at least for the time being.

I suspect that while some of the bargain hunters that have entered the market since late March will be happy to liquidate and retreat to the sidelines, the stance of a super accommodating Fed will encourage many fund managers to continue to nibble at equities in the belief that there is now a safety net under the market.

In yesterday’s commentary we reviewed the exchange traded fund, QQQQ, and today I thought we should look at the underlying Nasdaq 100 index (^NDX).

On the cash index the intraday high that was touched in Monday’s session, just above 2050 coincides almost perfectly with the 62% retracement of the interval between the late October high on the index and the March 10th low at 1672. We could retreat back to the 200 day moving average level around 1900 but as I suggested in the discussion on QQQQ yesterday it does seem likely that the area around 2100 on this index which became an actively traded price zone throughout December 2007 will be targeted again.

The broker/dealer sector (^XBD) has been behaving poorly recently with persistent attrition in stocks such as Goldman Sachs (GS) and Lehman Brothers (LEH)

The sector index dropped below the 50 day EMA yesterday as did Lehman and Goldman and as suggested below there is an ETF that would allow one to be short the sector

In overnight trading the Hang Seng (^HSI) fell back 1.6% after rallying in Wednesday’s session but the Nikkei 225 (^N225) in Japan managed to register a small gain. The divergent behavior, especially with the Japanese market not swooning in the face of the drop in New York yesterday and $135 a barrel crude must be seen as a positive for the Nikkei. As the chart below shows, the index has, from a technical perspective, been well behaved since the turning point in March and even during this recent pullback seems to have preserved the uptrend line and not violated the 50 day EMA. However, due to its under-performance last year the index still has to challenge its 200 day moving average.

I would keep an eye on this index over coming weeks to see how it performs in relation to its 200 day EMA, and perhaps even see the success or failure to penetrate and remain above this level as a barometer of global fund manager sentiment.


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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IAI  iShares Dow Jones US Broker-Dealers  

The sector fund for the US brokers/dealers, IAI, reveals weak technicals and would provide short exposure to the investment banks without having to be exposed to any individual company risk.

IBB  iShares Nasdaq Biotechnology  

The iShares fund for the biotech sector shows a clear failure pattern to break above overhead resistance. The drop below all three moving averages yesterday was also accompanied by an uptick in volume.

MZZ  UltraShort MidCap400 ProShares  

In my weekend analysis I discussed how the inverse leveraged fund MZZ provided an attractive trading opportunity to exploit the almost obvious vulnerability on the S&P 400 Midcap index discussed above. The fund gained 3.3% yesterday and could have further to go while the correction endures.

OSTK  Overstock.com Inc.  

Overstock.com (OSTK)continues to outperform the market as discussed in my weekend commentary.

CTSH  Cognizant Technology Solutions  

Cognizant Technology Solutions (CTSH) hit resistance at $32 and the preceding bear flag pattern suggests that there could be further scope on the downside.

BZH  Beazer Homes Inc.  

Some bearish patterns are more easily discernible than others, and the chart pattern for Beazer Homes (BZH) has been sending a clear message that the rally in late April was suspect. Moreover the initial drop below moving average support highlighted on the chart, followed by a mini pullback pattern, was also unsustainable. At this point the easy money has been made on the short side as buyers may be tempted back in as the stock approaches the March lows again.