Daily Form August 28, 2008


Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
THURSDAY AUGUST 28, 2008       02:59 ET

The Russell 2000 (^RUT) has performed pretty much in line with my expectations recently as a retreat to the pivotal 720 level seems to have resolved itself in favor of another move back to 760.

There are some clear parallels between the two rally failures that culminated in points A and B. Having retreated to, and tested quite convincingly the 720 level in Monday’s session, there is now evidence that the parallel patterns are deviating as the index appears to have reversed quite abruptly and be headed towards a re-test of the level seen at point B.

If, as seems very likely, the 50 day EMA moves above the 200 day EMA on this re-test and if the break is not a fake move on light volume this would be a very encouraging development for the bulls.

The euro is consolidating at previous chart support levels near $1.47 and there may be some follow through recovery as some pundits are suggesting that comments by two ECB governors about the need to keep a tightening bias on short term rates in the euro-zone should be taken seriously. The economic prospects for many of the major European economies are fading fast and I would be surprised to see the euro make it any further than $1.52/1.53.

The UK economy, which is not part of the euro-zone, is fading even more seriously than many of its continental partners and this suggests further weakening of sterling in the cross rate with the euro.

The chart for the Gold mining stocks (GOX)has some similarities with the chart for the euro and in line with my views on the currency I would see the 170 level as a key hurdle for this index.


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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XME  SPDR Metals and Mining ETF  

The SPDR Metals and Mining sector fund, XME, has been moving downwards in a staircase fashion since the critical trend line break in early July and leg 3 of the bearish pattern could soon be reaching another inflection point.

TSO  Tesoro Corporation  

Sometimes chart patterns produce signals that take some time to deliver on their promise. Ten day ago I noted that Tesoro (TSO) had registered a tiny doji/NR7 pattern which is often seen ahead of a decisive move. The stock had meandered for several sessions but in yesterday’s trading there was an eleven percent up move on very substantial volume confirming the positive divergences on the MACD chart.

EFU  Ultra Short MSCI EAFE Index ProShares  

The Ultra Short ETF’s pose certain challenges for chart analysis as the normal symmetry that would allow one to transfer inverse patterns that are applicable on the long side can be error prone. I feel a little more confident that the chart below for the Ultra Short fund for the MSCI EAFE index, EFU, is pointing to a fairly clear case of a negative divergence at a top. Moreover this prognosis appears to be in harmony with the interpretation that one would give to EFA which is the long version of the same index (although the long fund does not include the 2:1 leverage of the short version).