Daily Form October 7, 2008

Detecting Profitable Patterns For Active Traders
Trade successfully without having to be right about the underlying market direction
TUESDAY OCTOBER 7, 2008       07:34 ET

A recent news story in the UK reflects, at the level of the individual saver, the peculiar interconnectedness of the global financial system and the fallout that will continue to undermine confidence in banks. It is estimated that 300,000 UK based savers that were attracted to an Icelandic internet bank by high deposit rates are now stranded from their money. Sorting out the jurisdictional issues will surely keep several law firms gainfully employed for some time and raises a serious caveat emptor issue for those that are finding their savings at risk.

I have been examining the retracements of where we closed yesterday in relation to the bull market move from early 2003 until the fall of 2007 using weekly charts for a number of key indices. The 62% retracement of that entire move for the S&P 500 is in the region of 1100 and yesterday we lost contention with that level and now could be ready to test how solid support might be at the psychologically significant 1000 level.

The Nasdaq Composite (^IXIC) also reached a 62% retracement of the move but has yet to break definitively below this level.

The Russell 2000 (^RUT) has now broken below the 50% retracement level but one can make a strong case that the 540 level is now a probable target as that would provide a commensurate retracement to that seen by the S&P 500 and Nasdaq.

In yesterday’s trading Germany’s DAX registered its intraday low for a dramatic session just below the 5300 level.

The index could retreat to the 4530 level if it also retraces by 62%.


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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XLF  Financial Select Sector SPDR  

XLF has returned to the July lows and also to the spring 2003 levels. If we are not now fishing for a base in coming weeks for this sector then a lot of the "smart money" will have misread this crisis.

IBM  International Business Machines Corp.  

IBM has held up rather well during the downturn suggesting that institutions still consider it a relatively safe and core holding. The weekly chart shows the negative divergences in MACD and MFI during the summer rally showing and also points to the fact that some distribution to weaker hands was taking place.

Further weakness resulting in a decisve break below the 200 week EMA, which provided the resting place for yesterday’s close, shows that there is capacity for considerable downside risk.

SIJ  Ultra Short Industrials ProShares  

The Ultra Short fund for the industrial sector, SIJ, discussed here yesterday continued its explosive breakout to the upside and then ran into resistance. For those who like exciting trades any sharp pullback could provide an opportunity to ride another upward spike.