Daily Form September 8, 2008

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
MONDAY SEPTEMBER 8, 2008       07:21 ET

I am starting to lose count of how many times in the last year, according to the pundits, the US taxpayer has come to the rescue of the world’s financial system and saved us (?) from a global meltdown.

Under the new conservatorship arrangements (surely a euphemism for nationalization) those commercial organizations active in the mortgage markets have been given what they already thought they had which is an official ratification of the socialization of the liabilities arising from aggressive and mindless risk taking.

There is an old saying that one should be careful of obtaining what one wishes for and the underwriting of trillions of dollars worth of MBS’s may prove just such a conundrum. Greater transparency in financial markets is often held up as a virtue although one suspects that this is primarily by academics rather than those that actually work on a trading desk. With Treasury officials now required to value and understand the products of several years of ingenious securitizations it may prove harder to escape the emperor has no clothes syndrome.

Global indices are showing some big reactions already and the US market will be closely monitored today for the market’s assessment of whether the Secretary of the Treasury has now put in motion the solution to the global credit crisis.

Key upside levels on the S&P 500 (^SPX) are still 1320 which is the 50% replacement level and 1350 which is not only the 62% retracement but also coincides with the 200 day EMA. After today’s euphoria subsides it might also be worth considering downside targets too but that can wait for another day.

In European trading on Monday the major indices are surging ahead with most registering gains of three percent plus. London’s FTSE has gained 200 points so far, as this is being written, but this needs to be seen in the context of losing almost seven percent last week.

The 5500 level looks set to be challenged but, as the chart suggests, we must be careful that, after registering a failed break down from the triangular formation last week, there is not a similar break out to the upside this week which could eventually trap the bulls.

In trading Monday the Nikkei 225 pulled out of its recent downtrend just before hitting mid March lows but I would suggest that the 13000 level would be an attractive area for establishing new short positions.


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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EFU  Ultra Short MSCI EAFE Index ProShares  

EFU, the inverse leveraged fund for the MSCI EAFE Index may have registered an exhaustion island top in Friday’s session.

IDU  iShares Dow Jones US Utilities  

As anticipated in commentary last week the behavior of the utilities has the footprint associated with large hedge fund sector strategies. The bear flag set up proved to be a very reliable signal for impending weakness but it remains to be seen whether players will find the Fannie/Freddie news to be a reason to retire short positions.

IGE  iShares S andP GSSI Natural Resources Index Fund  

IGE the exchange traded fund which tracks the S&P Natural Resources Index has positive divergences.

XLY  Consumer Discretionary SPDR  

After Friday’s employment data there are increasing concerns about the fundamentals for the consumer discretionary sector and the chart for the sector fund XLY reflects some of this in a technically dissonant chart pattern.

NX  Quanex Corp.  

Quanex (NX) looks promising on the long side.