Daily Form October 3, 2008

Detecting Profitable Patterns For Active Traders
Trade successfully without having to be right about the underlying market direction
FRIDAY OCTOBER 3, 2008       07:06 ET

Today promises to be unusually febrile with (at least) two major pieces of market moving news for traders to contend with. The Non-Farm payrolls data will be released at 08:30 EDT and, probably, at some point today the House of Representatives will have another go at passing the Paulson rescue plan, which now looks more likely to be accepted. This will then allow the former Goldman Sachs chief and his appointees to apply their skills at pricing some impenetrably obscure derivatives for which there maybe no market at all. It may require a lot of lipstick to sell these on.

The general shape of the charts at the moment, and I am somewhat hesitant to draw too many conclusions from them, suggests that the market is now more concerned about the growing evidence that the US and much of Europe are, from a broader economic perspective than that of purely the financial economy, inter-related as they are, in the process of falling off a cliff.

The Dow Jones Transportation Average (^DJT) has plunged more than 12% this week so far and a possible downside target here is around the 3500 level which represents another 15% or so below the close yesterday.

The Russell 2000 (^RUT) has broken below the previous 2008 lows and as a barometer index this bodes poorly for the broad equity markets. There is a strong whipsaw potential in the current environment but it would seem that this index would really have to struggle to get beyond the 720 level on any rescue plan inspired rally.

I would conjecture that the financials may now begin a persistent period of diverging from the smaller cap and tech stocks.

Germany’s DAX is becoming one of the real laggards in Europe and the 5300 target that I have discussed here recently may turn out to have under-estimated the downside potential.

Japan’s Nikkei 225 could be set to return to spring 2003 levels if it fails to find support in the 10,000-11,000 region. Such a move would not be untypical of a major bear market and from reviewing the chart patterns of many other global equity markets there is a distinct possibility that, to paraphrase an old rock song, we ain’t seen nothing yet


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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SIJ  Ultra Short Industrials ProShares  

The Ultra Short fund for the industrial sector, SIJ, reveals an intriguing cup and handle formation from an inverse perspective. The classic pattern is more commonly thought of as a long setup and often portends an explosive breakout to the upside. In the current context the pattern rather aptly matches the recent and dramatic decline in the fortunes of the industrial sector.

XME  SPDR Metals and Mining ETF  

About six weeks ago I discussed the metals and mining sector and suggested that XME was on the verge, after completing the third step in a downward staircase pattern, of a steep fall in the light of a very bearish pattern.

Back then I did not contemplate such a drastic decline in such a short period which is grounds for addressing how sometimes it pays to be very patient on the short side and not take all of the profits out of a position when the chart is so bearish.