Daily Form June 3, 2008

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
TUESDAY JUNE 3, 2008       06:23 ET

The opening of a new month’s trading brought a rather nasty sell off across the board for equities which at one point earlier in the session threatened to become quite critical. There was a partial recovery later in the session and hammer candlesticks were the defining pattern for the day. The S&P 500 found support at its 50 day EMA but still trades below the 200 day EMA.

One of the longer lower tails to the hammer candlestick formation was seen on the chart for the Russell 2000 (^RUT) which managed to close just above the pivotal 740 level and also just above the 200 day EMA. As I have discussed a lot recently the small and midcap charts are not looking as problematic as the larger cap S&P 500 index and until (and unless ) there is evidence of any kind of breakdown in the S&P 400 Midcap and the Russell 2000 I shall maintain my cautiously positive outlook.


The CBOE Volatility Index (VIX) had one of its largest increases since the mid March lows and suggests that there had been a rather complacent attitude developing during the last few sessions. Contributing to the fear factor is that the banks and financial stocks have not put in the bottom that many had assumed was a fait accompli

The Shanghai Exchange (^SSEC) reveals a clear triangular pattern and constriction of the volatility bands which is a precursor to a directional breakout. The index should show its hand shortly and once the direction has been definitively established there will be a better read on some of the other emerging markets that are in "holding patterns" at present.

I drew attention recently in this commentary and also on CNBC’s European Closing Bell that shorting the exchange traded fund, IAI, which tracks the investment banks looked like a promising trade. The fundamentals for the sector are deteriorating and there are individual story stocks such as Lehmann Brothers, discussed below, which will keep the sector under pressure.

TRADE OPPORTUNITIES/SETUPS FOR TUESDAY JUNE 3, 2008



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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CECO  Career Education Corp.  

The bear flag and waning momentum discussed here last week has finally caught up with Career Education Corp (CECO)



AMGN  Amgen Inc.  

Amgen (AMGN) is emerging from the constricted range that we looked at last week but the action could not be called an explosive breakout. Perhaps given the market background the vitality of the move is not too surprising.



LEH  Lehman Brothers Holdings Inc.  

Lehmann Brothers (LEH) remains under pressure and certainly the short sellers appear to have the upper hand and may be able to force the stock back to the mid March levels.



WFC  Wells Fargo and Company  

Wells Fargo (WFC) is one of the banks that does not appear to be bringing out the bargain hunters in the manner that many were expecting. I am looking for an entry point on the long side when the dynamics become a little more compelling.