Daily Form August 24, 2007


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FRIDAY AUGUST 24, 2007       05:33 ET



Option writers were extravagantly rewarded during the recent periods of exceptional volatility and put buyers paid large premiums for their protection but the markets now appear to be settling down to a calmer, less turbulent trading conditions. As if to underline the point the DJIA finished the session within a point of its previous close and similar small changes were seen in the other indices including the UK’s FTSE.

The largest move was seen in the Russell 2000 (^RUT) which, as discussed in yesterday’s column, encountered resistance at the 800 level and the 200 day EMA and fell back by 1.3%. As we move into a week of late summer public holidays (Monday is a holiday in the UK and the following Monday is Labour Day in the US) it is likely that, if the relative calm can be prolonged and traders have increased confidence that they can leave their desks for the beach, the markets may enter a period of consolidation.

On the subject of heading to the beach, I shall be away myself for the next two weeks but before leaving I will be a guest this afternoon on CNBC’s European Closing Bell at approximately 16:20 London time.


The Nasdaq Composite (^IXIC) has also entered a zone, between the 200 day EMA below and the 50 day EMA above, where some consolidation and price congestion may appear.

The banking index (^BKX) is forming a triangular formation as it faces a quite well defined chart hurdle above current prices. As the chart annotations suggest the 112 level will provide a real test for those that believe that the recent credit market woes have been largely discounted and that with a more accommodative Federal Reserve the backdrop to the financial economy is improving.

Certainly there have been some notable moves in the sector and Wells Fargo (WFC) appears to be in the process of forming a bullish flag just after pulling back from its recent historic high.

TRADE OPPORTUNITIES/SETUPS FOR FRIDAY AUGUST 24, 2007



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.
For full details on time horizons, risk management and hedging techniques please visit http://www.tradewithform.com

CPKI  California Pizza Kitchen  

A lot of the focus at present is on the stamina of the consumer sector. Consumer demand represents almost two thirds of US economic activity and consumers have hitherto proven remarkably resilient during periods of relative adversity. Analysts will, even more feverishly than ususal, be monitoring all vital signs to see whether consumers are going to retain their acquisitive appetites in the coming months or whether the housing downturn and decreased availability of easy credit is going to lead to a significant slowdown.

Retailing and consumer discretionary stocks are revealing some of the more interesting patterns. California Pizza Kitchen (CPKI) moved down steadily throughout June and July but now appears to be in a basing pattern with signs of accumulation. The 50 day EMA (red line) corresponds quite closely to a declining trend line through the highs and the stock will need to take on this hurdle before it can turn positively bullish but the momentum appears to have transitioned noticeably from the previous negative tone.



LTD  Limited Brands Inc.  

Limited Brands (LTD) has a similar downward trendline to CPKI but this time it follows the 20 day EMA (blue line). The stock peeked above this line yesterday and once again the money flow dynamics have turned positive.



HSY  Hershey Foods Corporation  

Another stock that faces a similar down trend hurdle is Hershey (HSY). The main reservation preventing me from getting too enthusiastic about this stock is the monthly chart which looks distinctly bearish and it would seem that any upward progress in the short term will run into strong head winds in the longer term.

Daily Form August 23, 2007

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Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
THURSDAY AUGUST 23, 2007       07:37 ET

Many charts are revealing how much recent price patterns have been guided by two key technical indicators - the 50 day exponential moving average and the 200 day EMA. For example the daily chart for the Nasdaq 100 (^NDX) clearly illustrates how the 200 day EMA uncannily provided support during last week’s rout and how the fifty day EMA has been targeted for the recovery rally.

In yesterday’s trading the index came to rest at almost exactly the level for the 50 day EMA. There is a further hurdle to be crossed which is chart resistance/support at 1950 which sits less than one percent above yesterday’s close. My suspicion is that we may see a spike above that level in today’s trading but there will be difficulty in sustaining closes above that level without some price consolidation and digestion of the recent gains.


Echoing the observation that recent price action has validated the reliance on the two key EMA indicators, the Russell 2000 (^RUT) came to rest in yesterday’s recovery continuation almost exactly at the level of the 200 day EMA. The index faces not only the resistance provided by this key moving average but there is a chart based hurdle at the 800 level.

It would be surprising to see this index surge through this overhead resistance but, having said that, I am learning, in the current exceptional market conditions, to become quite relaxed about surprises.

Treasury yields especially of shorter duration securities have plunged over the last month as the flight to safety issues have become intermingled with speculation that short term rates are headed down. Also quite notable has been a steepening of the yield curve at the longer end and highlighting this, the 30 year bond closed yesterday at a yield of more than thirty basis points above the ten year note’s yield.

Despite erratic moves at the shorter end of the duration spectrum, the yield on this longest dated Treasury, currently close to five percent and the 200 day EMA, has been relatively stable during August.

TRADE OPPORTUNITIES/SETUPS FOR THURSDAY AUGUST 23, 2007



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.
For full details on time horizons, risk management and hedging techniques please visit http://www.tradewithform.com

FFIV  F5 Networks Inc  

F5 Networks (FFIV) continues to exhibit the characteristics of a bear flag formation and the pattern looks to be ripening as the volume on yesterday’s move up towards the 200 day EMA was on very subdued volume.



GOOG  Google Inc.  

Reinforcing the theme developed earlier regarding the two key moving averages, Google (GOOG) once again illustrates how the 200 day EMA provided intraday support during last week’s sell off and yesterday’s close yet again was exactly at the 50 day EMA.

The stock also faces chart resistance at $520.



STX  Seagate Technology  

One chart to keep an eye on for a possible bullish breakout in the medium term is for Seagate Technology (STX). A move above $25 on substantial volume could put the previous 2007 highs close to $28 back in play.

Daily Form August 22, 2007


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Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
WEDNESDAY AUGUST 22, 2007       05:33 ET


It was another erratic session yesterday as traders seemed to be preoccupied by the outcome of meetings involving Treasury Secretary Paulson and Fed Chairman Ben Bernanke. The current market climate is ideal for nervous rumor based trading which has the effect of quick rallies that fade and short squeezes that bring the index back to a neutral position. The 200 day EMA has proven to be a strong attractor and provides a good area for a holding pattern while traders digest the developments in the credit markets and wait for something from the Federal Reserve.

I sense that many in the market want to see a rally and there are some stepping up to the plate to go long in many technology stocks but there is the ever present fear that troubles amongst some financial intermediaries and hedge funds could derail any over zealous recovery efforts.


The oil services index (^OSX) appears to be vulnerable to further weakness as there is an area of moving average resistance above yesterday’s close and the chart appears to be forming a step down pattern.

The exchange traded fund for the utilities sector, XLU, has evidence that the money flow and momentum dynamics are in transition from the recent distribution and that we could see a recovery rally.

TRADE OPPORTUNITIES/SETUPS FOR WEDNESDAY AUGUST 22, 2007



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.
For full details on time horizons, risk management and hedging techniques please visit http://www.tradewithform.com

PTEN  Patterson-UTI Energy Inc  

One of several stocks that could be ready to pull out of its descent is Patterson Energy (PTEN).



CSCO  Cisco Systems Inc.  

There appears to be a well orchestrated effort on the part of many institutional analysts and asset managers to talk up the technology sector in the hope that this sector can provide a new leadership initiative to move the market beyond the turmoils that still hang over the financial sector. Cisco (CSCO) is one of the stocks that is most mentioned as being a future leader, but, leaving aside all the chatter, it does appear that the chart pattern is pointing to a potential price surge in the medium term.



GPI  Group 1 Automotive  

Group 1 Automotive (GPI) recorded an NR7 pattern yesterday and the underlying dynamics look constructive for a move upwards towards the 50 day EMA in the near term.



CMVT  Comverse Technology Inc.  

Comverse Technology (CMVT) is in the early stages of a recovery with evidence that the money flow has turned positive.

Daily Form August 21, 2007

TRADE WITH FORM
Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
TUESDAY AUGUST 21, 2007       06:54 ET

Yesterday’s session provided another roller coaster ride for traders but this was confined within a relatively narrow range. The S&P 500 (^SPC) concluded the session more or less where it had begun but directional uncertainty seemed to be the primary feature for all of the indices. As expected, after last week’s selling pressures there is a tentative and cautious tone to the notion of pushing back above the hurdle presented by the 200 day EMA.


The chart for the Nasdaq Composite (^IXIC) shows that there are a series of hurdles faced by the index which has managed to remain mostly above the 200 day EMA. The real test for the bulls is the highest hurdle that has been drawn in around 2600 which is where the breakdown from the uptrend from the March lows took place.

The exchange traded fund for the financial sector, XLF, has shown unusually heavy volume characteristics over the last month illustrating not only its usefulness as a tool for trading the sector but also for gauging what is happening, from a technical perspective, in the sector. The point A on the chart corresponds to last Thursday’s turnaround session and as the MACD and MFIC charts clearly reveal positive divergences were pointing to an imminent rebound in the fund which had been sold aggressively since breaking below the 200 day EMA in mid July.

The exact timing for trade entry when these kinds of divergences appear is far from exact but I have found them to be particularly reliable in my trading experiences.

TRADE OPPORTUNITIES/SETUPS FOR TUESDAY AUGUST 21, 2007



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.
For full details on time horizons, risk management and hedging techniques please visit http://www.tradewithform.com

AAP  Advance Auto Parts Inc.  

Yesterday’s suggestion regarding Advance Auto Parts (AAP) worked out well as the stock gained almost five percent and provided an entry opportunity very close to Friday’s close.



IPG  Interpublic Group of Companies Inc.  

Interpublic (IPG) looks as though it is preparing to move above an area that represents a convergence of all three moving averages.



APOL  Apollo Group Inc.  

Apollo Group is hanging on, barely, within a descending wedge formation and looks vulnerable in the medium term to a fall below the point where it gapped up in late June.

Daily Form August 20, 2007

TRADE WITH FORM
Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
MONDAY AUGUST 20, 2007       05:44 ET

Inevitably there was an enormous amount of commentary over the weekend regarding the Fed’s decision to cut the discount rate and the consensus view seems to be that the Fed will intervene again sooner rather than later to cut the fed funds rate by perhaps 50 basis points. The most astute insight that I encountered in my review of the decision was in answer to the rather obvious question - why would a bank want to borrow at the discount rate when the fed funds rate is (even after the cut) half a percent lower? Symbolism issues aside the most telling point is that collateral requirements for borrowing at the discount rate are less stringent for banks and other companies such as mortgage lenders than they are for qualifying for repos at the fed funds rate.

The implication is that many financial institutions need to borrow against mortgage backed securities rather than Treasuries which are the most common collateral for fed funds borrowing. Since the market in MBS’s has frozen the Federal Reserve is fulfilling its role as the lender of last resort to some distressed companies laden with securities that are being shunned by the interbank market. Another feature of Friday’s discount rate cut, and buried in the small print of the Fed’s decision, was the fact that they are also providing a facility for up to 30 days on borrowings which gives additional margins for comfort during this period of unusually illiquid money markets.

A lot of attention will inevitably be focused this week on signs that the Greenspan put had been reincarnated as the Bernanke put, and we may see an outright deliberate ploy by some traders to test how readily a safety net might be provided.

Reviewing the chart for the S&P 500 (^SPC) the index made a strong move in response to the cut but now needs to cross above the 200 day EMA. Noticeably in Friday’s trading the CBOE Volatility Index (^VIX) ended the session higher than it opened and it is a fairly safe assumption that unusually erratic price moves and intraday volatility will be a recurring feature of trading again this week.


The chart for the Russell 2000 (^RUT) reveals a very striking spinning top with a strong opening gap upwards. The index reached up to the 200 day EMA but closed almost exactly in the middle of the daily range.

As discussed in Friday’s commentary the banking stocks triggered the short squeeze that caused Thursday’s dramatic intraday turnaround and they continued further upwards in Friday’s session. Over two sessions the index has regained more than eight percent and some consolidation may now be expected as the index faces chart resistance at 112 and from the 200 day EMA which lies not far above that level.

The Nikkei 222 (^N225) concluded Monday’s session with a three percent gain and perhaps not surprisingly in conjunction with Friday’s long red candlestick, resulting from the more than five percent down move on that day, an inside day was registered. The long upper tail to Monday’s pattern suggests that institutional caution is still being encountered and that some are taking advantage of higher prices to continue liquidations. Once again it will be wise to keep the USD/YEN exchange rate on your screens this week.

TRADE OPPORTUNITIES/SETUPS FOR MONDAY AUGUST 20, 2007



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.
For full details on time horizons, risk management and hedging techniques please visit http://www.tradewithform.com

FFIV  F5 Networks Inc  

The chart for F5 Networks (FFIV) exhibits the characteristics of a bear flag formation and the stock faces resistance from the 200 and 20 day EMA’s which are not far from Friday’s close.



GS  The Goldman Sachs Group Inc.  

An intermediate term target for Goldman Sachs (GS) would be in the region around $200 but it almost certainly will not be a smooth ride.



AAP  Advance Auto Parts Inc.  

Advance Auto Parts (AAP) appears to be in the early stages of a recovery process and the selling climax that took place on August 9th has given way to some positive money flow divergences.

Daily Form August 17, 2007

TRADE WITH FORM
Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
FRIDAY AUGUST 17, 2007       04:29 ET

For market watchers glued to their screens yesterday the action at times was even more gripping than the best that Hollywood has to offer including the excellent Bourne Ultimatum . The wild session on massive volume powerfully illustrated the vicious nature of short squeezes in the context of extreme intraday volatility. As the index players were busily testing (and re-testing!) key support levels on the S&P 500 close to the March intraday lows there were clear signs that some canny traders were preparing the ground for a major rally and short squeeze in some oversold financial stocks.

Watching my screen around midday New York time yesterday there was a clear dissonance between what looked like a probable S&P breakdown below the 1370-80 level but at the same time significant buying taking place in some of the banks and other financial stocks. Mentioned here yesterday as likely candidates for a bounce, Citigroup (C) and especially Bank of America (BAC) were building nicely during the peak selling in the index futures. The ensuing short squeeze and index recovery was largely powered by strong moves across the banking sector with some standout performances form Bear Stearns (BSC), Washington Mutual (WM), Fannie Mae (FNM), JPMorgan (JPM) and Wells Fargo (WFC).

The follow up to yesterday’s discussion regarding the importance of the 200 EMA for the DJIA shows how the index heroically managed to recover from a more than 300 point drop intraday but came to rest almost exactly at the level from Wednesday in the immediate neighborhood of the 200 day EMA.


The Nasdaq 100 (^NDX) also closed almost exactly at its 200 day EMA again after a massive intraday excursion.

The banking index was one of the best performers in yesterday’s dramatic session. The rally could have some way to go and, as a more rational analysis and diffentiation of the strands of the financial sector and their exposure to the securitized debt obligations problem continues, I would suspect that the focus of worry will begin to move away from the mainstream banks towards the unregulated financial intermediaries which have far greater capacity for delivering nasty surprises.

So many tumultuous developments were part of yesterday’s global panic stricken trading session. Commodities sold off, precious metals plummetted, the yen surged, short term Treasury rates moved down below four percent and the VIX spiked up to touch 37.5 which is an extreme reading. Those were just some of the day’s highlights. In addition, the US’s largest mortgage lender, CFC, after announcing that it had called on an $11 billion emergencey credit facility saw a further large drop (but which in line with the market’s recovery was less severe on the close than it had been at the peak of yesterday’s panic selling).

Alas the Asian markets do not appear to have been heartened by the late recovery in the US markets. The Nikkei 225 (^N225) produced one of its worst sessions as it continued down another 5 per cent plus. An aggravating factor for this market is the dramatic rise in the yen against all currencies as massive redemptions are forcing hedge funds to abandon the carry trade. The Hang Seng as this is being written is also down by more than 4% and particular focus today will be on the European markets and in particular the FTSE which dropped more than four percent taking out the key 6000 level.

TRADE OPPORTUNITIES/SETUPS FOR FRIDAY AUGUST 17, 2007



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.
For full details on time horizons, risk management and hedging techniques please visit http://www.tradewithform.com

BAC  Bank of America Corporation  

Bank of America (BAC) may further benefit from the switch in sentiment regarding the banks but as mentioned yesterday the rallies could prove short lived as short sellers will want to test the down side again soon.



BSC  The Bear Stearns Companies Inc.  

Bear Stearns (BSC) was one of the principal actors that helped the genie to escape from the bottle and reveal the opacity of certain credit market derivatives. Yesterday’s powerful, short squeeze induced rally, was not however accompanied with the kind of volume that one would have expected from a 13% rise. The notion that major investment banking stocks could be trading like small cap tech stocks captures the spirit of the current market environment.



WFC  Wells Fargo and Company  

The chart for Wells Fargo (WFC) again reveals the powerful surge amongst some of the banks but there may be limited chart capacity for further progress.



PAAS  Pan American Silver Corp. (USA)  

One final chart - it was hard to select the most interesting from such an array of possibilities - is for Pan American Silver (PAAS) which saw one of the largest declines yesterday and taken in conjunction with a big drop in the price of gold must raise real questions about the traditional safe haven notions that are claimed for the precious metals.

Daily Form August 16, 2007

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THURSDAY AUGUST 16, 2007       07:02 ET

The selling persisted yesterday amidst new concerns about the integrity of the financial system which seem to be arising with the passing of each day. The focus chart for today is for the Dow Jones Industrials (^DJI) which is one of the last of the major indices to come down to its 200 day EMA. A lot of attention was paid to the fact that the index broke below 13000 in yesterday’s trading but from a technical point of view a lot more attention should be paid later today if the index breaks decisively below the 200 day EMA which lies uncannily close to yesterday’s close.


The S&P 500 (^SPC) tried to rally but once again succumbed to further attrition as the session wore on. A test of the 1380 level seems to be on the cards in coming sessions and when this is approached the reaction of trading desks will provide a useful insight into the intermediate term technical outlook for equities.

As investors continue to flee the financial services sector there has been some campaigning by institutional analysts that the next sector that should provide leadership once we get through the current turmoil will come from big name technology stocks. Some of the charts in the semiconductor sector have some of the more constructive patterns but there are others that are breaking down. IGW, one of the ETF’s in the sector has also now joined almost all major sectors in breaking below the 200 day EMA.

Overseas markets in Asia and Europe have followed the US down in Thursday’s trading. The Nikkei 225 (^N225) fell below 16,000 in Thursday’s trading but managed to recover some of its poise into the close and contain its losses at two percent. In the UK the FTSE is trading below 6000 as this is being written and this is not only a psychologically significant level but also an area of strong chart support/resistance.

Amongst the other cross currents that are swaying markets and are themselves a reflection of hedge fund dynamics, the yen carry trade is clearly being vigorously unwound with pronounced falls in several high yielding currencies and associated strength in the yen. The sterling/yen cross rate has dropped from 250 back to 230 during the last month.

The chart below is an index that we rarely feature but the seven percent drop in the KOSPI index for South Korea shows that the contagion appears to be spreading to markets that are not so obviously exposed to dislocations in the financial sector but which are likely to reflect a phase shift in global liquidity conditions.

TRADE OPPORTUNITIES/SETUPS FOR THURSDAY AUGUST 16, 2007



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.
For full details on time horizons, risk management and hedging techniques please visit http://www.tradewithform.com

C  Citigroup Inc.  

Is it time to start buying some of the beaten up banking stocks? The topic is being widely discussed and obviously opinions are all over the map but with many suggesting that better opportunities will present themselves and that there is no need to be in a hurry. While that sounds sensible the markets rarely behave as the conventional wisdom would suggest.

Some of the charts for the money center banks appear to be reaching levels where there is some evidence that the selling momentum has peaked and where some accumulation may be appearing. Citigroup (C) has some positive divergences and yesterday’s doji candlestick may be signifying an inflection point.

I would however not expect these stocks to turn on a dime and any rallies could prove short lived.



BAC  Bank of America Corporation  

Another graphical depiction of a possible long opportuntity in the banking sector is to be seen in the chart for Bank Of America (BAC). What can be said about this chart is that it is one of the least bearish looking formations in the US financial sector.



LEH  Lehman Brothers Holdings Inc.  

The investment banks have come down very heavily since mid July and one of the leaders to the downside has been Lehman Brothers (LEH). The long term weekly chart below shows that the stock is now in the proximity of a key trendline that runs through the weekly lows extending back to the March 2003 bottom.



CFC  Countrywide Financial Corp.  

Countrywide Financial (CFC) plunged by thirteen percent yesterday as doubts were raised about the company’s future viability amidst the turmoil in the mortgage and commercial paper market. If this company is genuinely at risk of having to seek protection then the housing woes may have a lot further to go. This was also reflected in the performance of the homebuilders that are still in free fall. Beazer Homes (BZH) closed at $10.48 yesterday and this is a stock that was trading above $80 in early 2006.



WYNN  Wynn Resorts Limited  

Wynn Resorts (WYNN) still has the essential characteristics of a bull flag formation that I touched on in Monday’s commentary and the stock has stood up well during this week’s sell-off.

Daily Form August 15, 2007

TRADE WITH FORM
Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
WEDNESDAY AUGUST 15, 2007       07:32 ET

Yesterday’s intraday action in the S&P 500 index proved to be one of the more difficult sessions to navigate as the repeated testing of a key level around 1430-3 appeared at several points to have held but then cracked at the end of the session. The index closed down 1.8% and registered a new closing and intraday low since the more recent turmoil began in July.

The next level which may need to be tested, perhaps in a hurry is the 1380 level which marks the lows from the earlier sell off in late February/early March.

The troubles in the credit markets continue to surface and this is a particularly treacherous time to be position trading and to that extent I will make no specific trade recommendations today. I plan to spend at least a few minutes of today re-reading elementary statistics texts on why one cannot infer much about the future from previously observed correlations and why the normal distribution is not a good framework for calculating risk probabilities.


The investment banking sector (^XBD) seems to be unable to stabilize and continues to drift lower. Those that listened into the Goldman Sachs conference call in Monday’s session, when the company acknowledged that some of its funds had lost about 30% of their value in recent weeks, may have had a hard time with squaring the notion that a statistical arbitrage strategy which was fundamentally flawed could somehow now be providing those injecting new capital with a great investment opportunity.

Reviewing the chart for the CBOE Volatility Index (^VIX) one could make the case, as some analysts are doing, that the markets have been transitioning during the last few months from one volatility "regime" to another. Such a regime shift, as it has been described by some academics, points to a radical change in the outlook for market conditions based on a fundamental change in market psychology.

The 1999-2002 period was a period or "regime" that saw substantial and prolonged high volatility in contrast to the 2004-even up to early 2007 period which was characterized by much more subdued volatility.

The current spike appears not be the relatively isolated phenomenon that the June/July 2006 or the March 2007 were and the heightened risk dynamics and uncertainties may be with us for an extend period.

New concerns emerged yesterday about the "robustness" of the consumer sector after downbeat outlooks from WalMart and Home Depot. This is where the fallout from the financial sector will begin to impinge on asset allocation decisions made on the more traditional (and saner) quantitative modelling of equitiy performance based on the quality of future earnings for the corporate sector.

The consumer discretionary sector fund XLY made a new low for the year and could be headed towards the $31 level which was seen in July 2006 when the markets also were recovering from another financial scare - this time largely based on a different variation of "low risk" quant inspired strategies. That time the problems were caused by the downgrading of GM’s debt and the large investment by Kirk Kerkorian in the common stock. Yet again this did not turn out exactly as the convertible arbitrage specialists were expecting.