Daily Form July 3, 2008

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
THURSDAY JULY 3, 2008       07:15 ET

During early June I commented several times on the relative out-performance of the S&P 400 Midcap index (^MID) following the correction that began in the latter part of May. As can be seen from yesterday’s action this index now appears to be playing catch-up with the other indices as it dropped by 3%. This index still remains about eight percent above the mid March intraday low below 740 and it will be informative to see whether the overall market can stabilize before this level is put in play.

The Nasdaq Composite index (^IXIC) dropped back by 2.3%, registering a bearish engulfment pattern and now could be headed to a test of the intraday low around 2150 which is 100 points below yesterday’s close. As with the Russell 2000 it may be that the overall market cannot stabilize until the respective 2008 lows have been tested.

Asian trading on Thursday produced a diverse array of performances with the Nikkei 225 concluding the session more or less unchanged, the Mumbai Sensex dropping by four percent but the Shanghai Exchange finding some support with a two percent gain. The Hang Seng Index (^HSI) dropped back by more than two percent with most of the losses coming late in the session and bringing the index to within a hair of the mid March low.


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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IYM  iShares Dow Jones US Basic Materials  

On Tuesday I pointed to the evidence of technical deterioration in the IYM sector fund and yesterday morning I underlined the weakness in the basic materials sector fund XLB. Both funds dropped sharply yesterday. A short position in IYM established during Tuesday’ session could have delivered a seven percent return yesterday and for XLB a four percent plus would have been achievable.

IYM came to rest exactly at the 200 day EMA.

IYT  iShares Dow Jones Transportation Average  

IYT, the sector fund which tracks the Dow Jones Transportation index, was a major casualty yesterday although volume was not substantial.

XME  SPDR Metals and Mining ETF  

Adding further emphasis to the bearish performance of the industrial materials sector was the very sharp plunge of the SPDR Metals and Mining sector fund. On almost three times the daily average volume the fund produced one of the biggest red bars of a very difficult session and registered almost a 12% loss.

EZA  iShares MSCI South Africa Index  

Back on June 12 the following point was made in this commentary - "EZA which tracks the South African index is dropping precipitously and the volume yesterday was three times the average daily volume. Clearly the mid March levels need to be tested."

REDF  Rediff.com India Ltd.  

Rediff.com (REDF), the Indian online content provider, produced a powerful surge in Monday’s session and has pulled back in the last two sessions. The inside day pattern on reduced volume yesterday trigged a pattern recognition alert for the long side which has proven to have a favorable risk/reward ratio.

SHW  Sherwin-Williams Company  

Sherwin Williams (SHW) has a slightly different configuration to REDF but somewhat similar reasoning could be applied to suggest that the long side could provide an opportunity in coming sessions.

SU  Suncor Energy Inc.  

Suncor (SU) has fallen in almost uninterrupted manner since peaking in the latter part of May but has now reached potential support at the 200 day EMA.