Daily Form July 21, 2008

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
MONDAY JULY 21, 2008       07:01 ET

Reviewing charts this weekend shows that many asset classes are at key levels and one suspects that this coming week could clarify some of the market’s intentions regarding the numerous economic and financial cross currents.

One of the most pertinent charts is for commodities in general, as represented by the Jim Rogers Commodity Index (^RCT). Friday’s close put us just below the trend-line through lows since the turn of the year and also below the 20 and 50 day EMA. If the hard asset enthusiasts are not ready to throw in the towel we are now at levels where one would expect to see some broad buying support for certain commodities. On specifics the Amex Natural Gas Index (^XNG) achieved the 625 level discussed here more than a week ago in Friday’s trading.

Asian trading on Monday morning brought divergent performances from two barometer indices. The Nikkei 225 failed to make progress despite the positive tone to the latter part of last week in the US, whereas the Hang Seng (^HSI) managed to move ahead by 3%.

The doji star closing pattern on the Hong Kong index chart shows a violation of the recent downward trend-line which also tracks the 20 day moving average. Taking a longer term perspective it would seem that the longer lasting trendline which coincides closely with the 200 day EMA at around 24000 will provide a major hurdle as we approach the Beijing Olympics.

The FTSE 100 could find that the support level near 5400 which was violated on July 11th’s sell off may now pose a challenge to further recovery in the near term.

The broker/dealer sector has snapped back strongly as short covering gathers momentum amongst the financials. As suggested here recently the fundamentals for the investment bankers are changing with fewer opportunities for "cutting edge" financial technology and I would expect a re-evaluation of upside potential from some investors that have grown accustomed to lucrative margins for all of the big players in the 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.
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FXE  Currency Shares Euro  

The Euro/USD cross rate is another market which is sitting at a key level. Reviewing the chart below there is a case to be made that last week’s shooting star formation at the $1.60 could represent a double top failure pattern. The retreat from the most recent attempt to hurdle the $1.60 has been subdued unlike the drop that followed the attempt back in April. If the euro remains above $1.58 in the near term, in European trading Monday it remains above $1.59, I would suggest that odds favor another effort to seek out higher levels.

IYM  iShares Dow Jones US Basic Materials  

The industrial materials sector is experiencing congestion at the 200 day EMA and the rather pronounced triangular pattern suggests that a directional breakout is imminent.

DUG  UltraShort Oil and Gas ProShares  

The long position in the Ultra Short Oil and Gas sector fund, DUG, has proven to be very profitable but the exit target which was set near to the 200 day EMA was met in last Thursday’s session. The clear break out from the downtrend may turn out, at least in the near term, to have been a trap for those seeking large positional bets on a decline in the energy complex (this is an inverse fund) but there is a definite technical hurdle to overcome at $36 on this chart.

One of the advantages of this sector fund is that it amalgamates prices across two key commodities and allows one to have a view of energy prices rather than separate view of oil and natural gas.

SHW  Sherwin-Williams Company  

In comments on July 10th I noted that Sherwin Williams (SHW) along with most stocks had been experiencing substantial whipsaws but that the positive technical pattern was still intact. Late last week the stock surged and would have rewarded more than 12% since recommended.