Daily Form June 4, 2008

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
WEDNESDAY JUNE 4, 2008       06:23 ET

Are the bulls fatigued or are they waiting for an even more enthusiastic display from the macro fund short sellers? There was something a little fishy for me about yesterday’s market action - involving as it did quite a lot of gyrations in Lehman Brothers (LEH).

We have seen climactic selling twice before associated with banks in trouble. The first was ultimately traced back to Soc Gen in Paris which, at least according to the official story, had to unload the bad trades of a "rogue" trader. The second of course was associated with the run on Bear Stearns which culminated in the rescue and the changing of the rules regarding the kind of funding facilities that the Fed would extend to the investment banks.

I think we are setting up for another short squeeze but from current or lower levels I wouldn’t want to conjecture. The 1370 level seems to be supported on the S&P 500 and to that extent we are 100 points above where we were on this index at the previous "crises". However there is the quite plausible case that could be made that the next leg down would take us back for a re-test of the 1270/80 region again.

The technicals on the chart for the S&P 500 (^SPC) look almost too well designed to spook long only fund managers to keep liquidating but on the other hand the midcap and small cap indices do not have the same ominous characteristics.

The S&P 400 Midcap index (^MID) registered a doji star candlestick with a zero percent change on the day despite the more drama charged session for its sibling larger cap index. Much more favored by derivatives traders and macro funds the S&P 500 is undoubtedly being featured in inter-market strategies in comparison to the lower profile midcap index.

To repeat the point I made yesterday I am not ready to switch to the bearish camp for the intermediate term until I see real trouble emerging for the midcap and smaller cap issues that are embodied in the Russell 2000.

XLF, the sector fund for the financial services fund, ticked up in volume as it approached the 2008 lows. Previous broad rallies have been triggered by big intraday moves in the financial services sector and although it may be too trite to look for another similar episode I shall be watching this index over the next few sessions. In particular Friday’s economic data could be the catalyst for a big move.

IYH, the sector fund for US health care industry, shows remarkable price congestion that will need to be resolved soon in some kind of directional breakout. Some technical and anecdotal evidence suggests that some asset managers are quietly building long positions in this sector.


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

BA  Boeing Company The  

Last week I pointed to potential weakness ahead for Boeing (BA) and yesterday the stock was one of the biggest contributors to the weakness of the Dow Jones Industrials.

DRIV  Digital River Inc  

Digital River (DRIV), discussed here last week, reasserted the momentum that allowed it to gap up above its 200 day EMA and added another 4% yesterday.

LEH  Lehman Brothers Holdings Inc.  

Lehmann Brothers (LEH) remains under pressure but even a whiff of a rescue plan or a convincing case that recapitalization could be conducted without a panic would send the short sellers into panic mode.