Daily Form September 18, 2008

Detecting Profitable Patterns For Active Traders
Trade successfully without having to be right about the underlying market direction
FRIDAY SEPTEMBER 19, 2008       06:47 ET

Recently here I suggested that we all had to hope that Secretary Paulson had another rabbit in his hat. When the European markets closed yesterday failing to rally after an injection of $180bn and Morgan Stanley and Goldman Sachs looked like they were about to be thrown on to the bonfire of vanities the authorities knew that they had to perform like true magicians. So we got two elements in a carefully planned set of leaks/announcements. Firstly the UK’s FSA came out with an outright ban on short selling of financials and then we got the news that an RTC type solution to the systemic financial crisis was being sketched out with Congressional leaders. Perfect timing and worthy of a true magician.

The nasty hedge fund fat-cats were set up as the distraction while the real illusion is performed which is that the effective nationalization of the illiquid assets of the banking system will restore confidence to the system. And it probably will - eventually - and until the accident prone bankers screw up again with more innovative financial techniques!

What is really crafty about the idea is that since it is still vague and has so many nuances and complexities to be ironed out it will allow for a stealth like alignment of the twin needs of separating out good bank/bad bank stuff with the other vital dichotomy private gain and public loss.

The timing of this was critical and is well reflected in the chart below for the VIX which shows that maximum fear as the 42 level was breached was the signal to the "authorities" that they really had no choice but to fire the biggest gun left in their arsenal.

One of the awkward questions that is going to have to be answered is what kinds of instruments will the RTC type entity be actually buying from the distressed banks? Presumably it will include all of the toxic structured instruments that do not trade, cannot be marked to the market and that none of the astrophysicists who concocted them can value either. What price should be paid for these exotic items? How long does the public sector keep them on its books?

If this issue doesn’t finally reveal the completely bogus way that the mathematics of risk management are being practised then nothing will.

Having got all of that off my chest one is reminded of the saying that the more things change the more they stay the same.




The FSA in the UK have moved the goalposts in a major manner and it is having the expected effect for the FTSE as a massive short covering is taking place in all of the battered financials. This will not be a champagne occasion for some in Mayfair tonight.

The Asian markets had a bonanza session with the Hang Seng index (^HSI) seeing an almost ten percent rally. But reviewing the chart it still apparent how much damage has been done to sentiment in this very speculative market.

The most dynamic move in the US equity indices yesterday was seen in my favorite barometer index the Russell 2000 (^RUT) which surged by seven percent and regained a close above the 720 level. Perhaps we will get the test of the 760 level that I was discussing here just two weeks ago and which following the recent events was something I did not believe we would see for quite a while.

What continues to make markets so fascinating - truth is stranger than fiction - is that I would not be surprised to see us above 760 in coming sessions or below 660.

TRADE OPPORTUNITIES/SETUPS FOR FRIDAY SEPTEMBER 19, 2008



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

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.

TRADE OPPORTUNITIES/SETUPS FOR WEDNESDAY SEPTEMBER 17, 2008



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.