Daily Form September 3, 2008

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
WEDNESDAY SEPTEMBER 3, 2008       05:06 ET

The concern that I touched on yesterday regarding the technology sector and the technical condition of the Nasdaq 100 (^NDX) found further expression in yesterday’s trading.

It is always good to be wary of "violations" of trend line support when volumes are not substantial (although volume on QQQQ did pick up during yesterday’s session). Adding further support to the idea that a re-thinking is taking place amongst fund managers about the outlook for the sector, based on perhaps over generous price/earnings multiples and valuations, was the price reversal that took place during the day following the earlier bout of post Labor Day enthusiasm.

The Russell 2000 (^RUT) spiked up intraday to 755 yesterday and closed with a rather striking candlestick formation. An inside day on Friday followed by a whipsaw spinning top yesterday near to a significant high is a pattern that will make me especially vigilant with the small cap index in coming sessions for seeking out short term clues as to overall equity market direction.

Commodities dropped across the board yesterday and there were some significant shifts across sectors suggesting that asset allocation strategists are beginning to place their inter-market chips on the table.

One chart that I shall be watching closely is for the CBOE Volatility Index (^VIX) which is now challenging the upper trend-line which tracks a recent decline in the market’s anticipation of future volatility. If we see continued weakness in the tech sector, a failure by the Russell 2000 to take on the 760 level, and a break through the VIX channel at the 200 day EMA indicated on the chart below, this would move me away from my intermediate term positive bias.


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  

Last week I discussed the metals and mining sector in this commentary as well as during an inteview on CNBC last Thursday and suggested that we were on the verge of completing a third step in a downward staircase pattern.

Yesterday’s action produced the anticipated price rejection very near to the intersection of key moving averages and would have yielded a 7% plus return on the short side.

XES  Oil and Gas Equipment Services ETF  

Many charts for energy related sector funds are breaking below key levels.

XLU  Utilities Select Sector SPDR  

Often the price behavior of the utilities tracks moves in the long term Treasury market but we are beginning to see divergences as yields on 10 year notes are falling but the pattern for the utility sector is looking weak.

Many asset allocators appear to be seriously grasping the threat to consumer related stocks as daily evidence of the global slowdown appears in a slew of government and analyst’s reports.

IXN  iShares S and P Global Technology  

IXN which comprises stocks from global technology is exhibiting corrective patterns that could suggest a return to levels seen in July and previously in March.

XHB  Homebuilders Select Sector SPDR  

In a day of erratic market moves and whipsaws, characterized by the large number of spinning top/star formations, the sector fund for homebuilders, XHB, suggests that a possible rally top may have been seen at the 200 day EMA.