Daily Form July 30, 2008

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
WEDNESDAY JULY 30, 2008       04:26 ET

Following on from Monday’s low volume sell-off the markets reversed yesterday and mounted a sizable rally with slightly more substantial volume. What is most striking about the asset rotation strategies that are currently being implemented is the rapid alternation between sessions when the financials are pummeled only to be followed within hours with manic short covering. Yesterday we saw a coordinated strategy, inspired by the boldness of Merrill Lynch’s decision to effectively establish a benchmark valuation for the CDO "toxic waste", in which oil, the euro and some industrials were sold and the banks, especially the investment banks surged ahead.

Volume was not decisively bullish, except in some of the financials, and the S&P 500 (^SPC) still has to confront an important resistance level at 1275. It may be that the market will now remain cautious ahead of Friday’s employment data but even if we see a rally continuation there will be a key test around 1320.

Last Friday’s discussion of the likelihood that the British pound was approaching an inflection point as it made one more attempt to break above 1.99 was confirmed in yesterday’s trading. The hourly chart for the last several sessions reveals the failure at the descending trend-line through the highs and suggests that sterling appears to have registered an intermediate term high.

QQQQ has been moving sideways in recent sessions and the volume chart reveals that yesterday’s upward move was still sub par in terms of volume. While the financials continue to gyrate the bullish case for equities continues to be made by the small cap Russell 2000 index and, if there is a decent rally ahead, one would want to see some price and volume strength amongst the Nasdaq 100 stocks.


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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SMH  Semiconductor HLDRs Tr ML  

There are positive divergences on the daily chart for SMH, the exchange traded fund for the semiconductors.

EBAY  eBay Inc.  

EBAY has been pulling back, following the recent plunge, and could find it difficult to make further progress as previous chart support could now become a resistance threshold.