Daily Form July 17, 2008

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
THURSDAY JULY 17, 2008       06:04 ET

The chart below suggests that the capitulation event that many analysts have been waiting for actually occurred in Tuesday’s trading. SKF, is the inverse leveraged tracker for the financial services sector, and if the chart is turned upside down the panic low as it were would correspond to Tuesday’s candlestick. Also from the upside down perspective this would be a good example of the morning star pattern.

Certainly the range covered and the magnitude of the price change yesterday suggests that the financial sector should bounce further. But the volume was not climactic and bottom fishers in the banks have been disappointed several times recently.

The Russell 2000 (^RUT) has been a useful barometer in suggesting that some fund managers were not despairing of the long side. The 660 level proved to be a formidable support level although, not surprisingly in view of the massive degree of short covering that was taking place yesterday, it was the larger cap stocks that had the most ground to make up.

The S&P 500 (^SPC) needs to confront several layers of resistance at 1275 (the 38% retracement level) and chart congestion in the region of 1280. Volume on the SPY contract was not as strong as might have been expected and reinforces the notion that much of the action yesterday was being lead by index futures traders and involved inter-market strategies with currencies and crude.

The Oil Index (^XOI) may be reaching potential support levels near 1270.


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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WFC  Wells Fargo and Company  

Yesterday’s chart for Wells Fargo (WFC) is quite extraordinary. When a bank stock moves up almost one third of its value in one session there should be pause for re-evaluating traditional notions of what stocks qualify as volatile and candidates for a low/medium risk portfolio.

XOP  SPDR S and P Oil & Gas Exploration and Prod   

Discussed here in Tuesday’s commentary XOP, the exchange traded fund that is derived from the oil and gas exploration and production portion of the S&P index, has performed well on the short side after registering a well defined bear flag and negative divergences during June.

IDU  iShares Dow Jones US Utilities  

Apart from energy related stocks one section of the market that was a major casualty yesterday was the utilities sector. IDU, which tracks the Dow Jones Utilities, has decisively fallen below all three moving averages and seems headed for a test of the 90 level. Investors in the utilities were undoubtedly paying a lot more attention to the alarming CPI numbers released yesterday than those traders that were scrambling to cover short positions in the financials.

LEH  Lehman Brothers Holdings Inc.  

Lehman Brothers (LEH) gained 25% yesterday although as the chart reveals this very large move seems dwarfed by the magnitudes of the recent plunges in the stock. Volume was below average and the focus by the company’s CEO, Richard Fuld, on short sellers could reinforce some skeptics in the view that this is being used by the bank as a diversionary tactic.

XLE  SPDR Energy Sector  

The SPDR Energy sector fund, XLE, dropped below the 200 day EMA on strong volume yesterday. There is clear evidence of a bear flag pattern but the intuition is that much of the easy money may have been made on the short side in the near term.