Daily Form August 26, 2008

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
TUESDAY AUGUST 26, 2008       07:12 ET

For those of a bullish persuasion there may be some comfort to be drawn from the fact that yesterday’s rather sharp sell off in the US market was accompanied by the unsurprisingly light volume of the last Monday in August.

The Russell 2000 (^RUT) produced exactly the testing of the 720 level that I discussed last week and fell relatively further than other broad indices.

This index now confronts a potential break of the upward slanting trendline since mid July and is also confined above by the potential double top pattern. As we move into September the conviction of those who have been steadily accumulating in the small cap sector since March will continue to be tested by the erratic outlook for the financial sector. Unless the Russell 2000 provides clear evidence of a breakdown in coming sessions I would remain moderately positive about US equities in the near term but want to re-evaluate that outlook if and when this index tries to rally back above 760.

The CBOE Volatility Index (^VIX) remains within a downward channel since the mid July low but a clear break above the 22 level, at which the moving averages intersect, would suggest that institutional managers are still not convinced that the worst of the financial mess has been seen.


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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AMGN  Amgen Inc.  

Amgen (AMGN) appears to be defying gravity at current levels.

DBA  PowerShares DB Agriculture  

The exchange traded fund, DBA, allows participation on the long side in various agricultural futures contracts and the recent chart action shows that, despite a temporary break below the 200 day EMA, there appear to be more constructive chart dynamics emerging.

FXP  Ultra Short FTSE-Xinhua China 25 Proshare  

FXP is an inverse leverage fund that would profit from further weakness in the Chinese market. Some recent analysis of applying standard technical pattern analysis to these Ultra Short funds suggests that one has to be relatively cautious in following signals that are reasonably reliable with long sector funds to inverse funds.

In addition the leverage of two to one would keep me on the sidelines at present but a break above the recent high just below 100 would suggest that the highs seen in March could be back in play.

MER  Merrill Lynch and Co. Inc.  

From a technical perspective Merrill Lynch (MER) is in a basing pattern and there is some evidence of accumulation with positive MFI divergences.