Daily Form September 17, 2008

Detecting Profitable Patterns For Active Traders
Trade successfully without having to be right about the underlying market direction
WEDNESDAY SEPTEMBER 17, 2008       06:01 ET

The tumultuous developments of the last few days are being memorialized in some quite extraordinary charts. Normal indicators should be held in abeyance at the moment as these are extraordinary times so I shall simply comment on some of the implications of the charts I have included.

The enormous green candlestick on the chart for the yield of the 30 year Treasury indicates most clearly the fear that was registered in trading in New York on Tuesday as the inter-bank market froze up completely and all evidence suggested that AIG was about to file for bankruptcy protection. The yield actually touched 3.89% which may be some kind of capitulation moment that technicians have been waiting for.

The fact that this capitulation did not really arise in the equity market underlines the fact that the current crisis originated with all of the issues in the financial system and may still not have been fully discounted by equity traders. One final point is that the Hang Seng index (^HSI) dropped another 3.5% in Wednesday trading and seems to have taken little comfort from the AIG news.

Oh and by the way the Fed left rates unchanged - nearly forgot that.

The mid-July low broke down on the S&P 500 as was being suggested by the downward wedge pattern. The index touched 1169 but rallied into the close and regained a footing above the 1200 level.

It is getting too treacherous to ask whether this really was the bottom (probably not) but moves back towards the descending line of the wedge are certain to find the 1270 area very turbulent.

The VIX topped out yesterday just below the mid March high and reflected the fears and rumours about AIG that haunted the markets all day.

The nationalization of the insurance conglomerate which was announced late Tuesday, after the markets closed, may have marked another short term top in this index, but trading desks will surely remain jittery while the implications of ongoing concerns about counterparty risk remain at the top of the agenda.

The FTSE broke below the pivotal 5000 level in yesterday’s trading but managed to claw its way back to close above that level. As this is being written it appears that two of the large high street banks - HBOS and Lloyds are finalizing arrangements to merge/amalgamate. Details are not yet available but the questions about the ongoing funding of HBOS in the wholesale money markets simply would just not go away, and the UK Treasury must be relieved that a private sector solution seems to be under way avoiding the need for another Northern Rock rescue.


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

GS  The Goldman Sachs Group Inc.  

If the world is not about to cave in then bargain hunters may be attracted by the fact that Goldman Sachs (GS) has not been this cheap since late 2005 and is now about fifty percent below its all time highs registered last fall.

LQD  iShares iBoxx Invest Grade Corp Bond  

One final eye catching chart from yesterday, which shows the opposite side of the coin to that seen in the long Treasury chart, is the plunge in the price of investment grade corporate bonds as reflected in the exchange traded fund LQD. Volume was six times the daily average and shows how the ETF marketplace is becoming an increasingly significant part of the asset class mix.

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