Daily Form September 16, 2008

Detecting Profitable Patterns For Active Traders
Trade successfully without having to be right about the underlying market direction
TUESDAY SEPTEMBER 16, 2008       06:28 ET

Many Asian markets that had a public holiday on Monday caught up with the weekend’s developments in Tuesday’s session. The Hang Seng Index (^HSI) dropped more than five percent but ended the session at the same level it opened.

In general I believe that this is a very scary market and I am watching on the sidelines and advising clients to do the same. The value destruction on the long side is quite horrendous and lots of evidence suggests that we may be approaching a major bout of climactic selling. On the short side one also has to be very careful as there could, on any perceived good news at almost any moment, be a massive squeeze play where carefully planned stop losses become a little academic for many traders.

The chart for the Russell 2000 (RUT) reveals two key violations of trend-lines during the last two weeks.

The first break which brought the index below the 720 level was the real alert that the tide was turning and yesterday’s more drastic violation of the trend line shows that this index seems destined to retest the 660 level.

I would suggest that if the 660 level fails to attract real buying interest in the small caps, which is certainly the presumption, then a new bear leg down on the major US indices could have at least ten percent further to run.

The financials seem destined to revisit the July lows in coming sessions. A lot of the "smart money" had been speculating that the bottom was in place for the sector so a break below the low seen on July 15th in the XLF fund could see a less than orderly liquidation.

Despite the plight of banks and financial services the rout yesterday did not inflict real damage to the homebuilders. With XHB I am still of the view that the bottom is in place but would not be surprised to see a retracement towards the 50 day EMA.


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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BAC  Bank of America Corporation  

Clearly some investors in Bank of America (BAC) do not appear to be comfortable with the notion that the bank had sufficient time over the weekend in New York to do proper due diligence on Merrill Lynch’s balance sheet.

A more cynical commentator might even suggest that they could have had several months to review and digest it but still not have really understood it.

SJF  Ultra Short Russell 1000 Value ProShares  

SJF, the Ultra Short fund which is an inverse leveraged play on the Russell 1000, mentioned in last week’s commentary has rewarded well but as with all leveraged plays one should not overstay one’s welcome.

RWR  DJ Wilshire REIT ETF  

One exchange traded fund worth considering in the real estate sector is RWR which tracks a number of REITs. This fund broke below a key uptrend line yesterday and looks set to return to the $60 level at least.