Daily Form August 1, 2008


Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
FRIDAY AUGUST 1, 2008       06:15 ET

A pronounced triangular pattern is evolving on the daily chart for the S&P 500 ($SPX) and this points to the fact that a directional breakout is looming. Yesterday’s downdraft registered an inside day and brought the index back to a close below the mid March lows/support levels which now are acting as a resistance threshold.

The markets have a lot to digest in coming sessions with today’s employment data being just one of a number of potentially market moving announcements. The market may already have discounted a weak Non Farm Payrolls number today as it had to contend with a sharp increase in jobless claims and a revision to the fourth quarter GDP numbers that showed to use the euphemistic term employed by government economists - negative growth. Even if the breakout does not come today the decision by the European Central Bank next week could also disrupt the range bound behavior of the currencies and be the accompaniment to a more decisve move for US equities. As discussed yesterday I would still expect 1320 to be a key hurdle on the upside.

A triangular pattern is also evident on the yield for the ten year Treasury note. Yesterday’s close just below the pivotal four percent level also sits astride the intersection of all three moving averages.

As noted in regard to the performance yesterday of the S&P 500 an anticipation of a weak employment report may already have been discounted yesterday. The surprise would be that the data is less weak than expected but any reaction to today’s US data is likely to be muted by the intermediate term direction of the dollar which still has to take on the outlook for rates in the eurozone.

In Friday morning trading the British pound is displaying breakdown behavior. The hourly chart reveals the rejection at the $1.99 which occurred yesterday around 08:30 Eastern time after the GDP and jobless claims were reported. The chart for the Euro shows similar rejection at the $1.57 level but in trading this morning it is sterling which is showing relative weakness. A decisive rejection at $1.98 in today’s session may set the tone for trading next week as UK fundamentals continue to decline at a rather disturbing rate.


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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EEM  iShares MSCI Emerging Markets Index  

The exchange traded sector fund which tracks the MSCI Emerging Markets Index, EEM is revealing positive MACD divergences. Also evident is the inside day pattern yesterday which was also dwarfed by the notable range expansion that accompanied the upward push on Tuesday.

XLV  Health Care Select Sector SPDR  

I am continuing to monitor the health care sector fund, XLV, which is showing characteristics that are often a precursor to an upward breakout.

LQD  iShares iBoxx Invest Grade Corp Bond  

One barometer of the market’s expectations as to inflation and the underlying economic data is provided by the appetite for investment grade corporate bonds. The exchange traded fund LQD shows a volume spike yesterday and coupled with the performance across many of the financials suggests that asset allocators may be locking down yields now in anticipation of further weakness in the global economy and reduced expectations about commodity based price pressures.