Daily Form October 15, 2008

Detecting Profitable Patterns For Active Traders
Trade successfully without having to be right about the underlying market direction
WEDNESDAY OCTOBER 15, 2008       07:00 ET

After several weeks of being mesmerized by the fascinating but relatively arcane matters of ever widening spreads in the CDS market, issues to do with how to mark illiquid CDO’s and historically high LIBOR rates, asset managers can now turn their attention back to ever growing signs of a global recession.

The action in the Nasdaq 100 (^NDX) yesterday could, in its own way, be just as problematic for equities as the recent pre-occupation with the freezing up of the inter-bank market. If the earnings season proves as disappointing as some are forecasting perhaps this index will be leading the way forward to another leg down in US stock indices.

The long end of the yield curve is showing signs that the stress of enormously increased supply could require a healthier coupon than might be expected during a downturn in economic activity. By alleviating some of the anxiety about the integrity of other fixed income instruments there could be a higher price to be paid on government debt as its allure as a flight to safety dissipates.

The recovery pattern in the S&P 400 Midcap index (^MID) is looking pale in comparison to its larger cap sibling and the cautious comments that were made here yesterday in connection with the Russell 2000 index (^RUT) apply to a large extent to the midcaps as well.


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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RWR  DJ Wilshire REIT ETF  

In yesterday’s column I drew attention to the bearish potential for the sector fund IYR which reflects the Dow Jones US Real Estate index. The fund dropped by more than seven percent and a comparable move was seen in RWR which represents several of the major REIT’s. This latter fund would seem to face a real hurdle in climbing above the resistance level marked on the chart just below $60.

GS  The Goldman Sachs Group Inc.  

It is still taking a large mental adjustment for me to embrace the notion that, to put it somewhat simplistically, the US taxpayers now have a stake in Goldman Sachs. The business model for this company will be undergoing a profound transformation and previous earnings growth prospects may come to seem a distant memory. Rallies up to the 50 day EMA should be seen as a good opportunity to exit the stock in my estimation.

MS  Morgan Stanley  

The recovery of Morgan Stanley (MS) has been dramatic and while some of the more pessimistic pronouncements about the stock last week and the strength provided by the tie up with Mitsubishi were clearly overdone there is a residual sense that, in a similar fashion to the arguments about the unlikely return to halcyon days for Goldman, this stock looks to be vulnerable as it approaches the $30 level.

SCHW  The Charles Schwab Corp.  

Schwab (SCHW) performed a rather striking reversal yesterday with an outside session that superseded all of the gains from Monday’s session. There could be further corrective action to come here as prospects for the retail brokerage industry would seem to be questionable to put it mildly.

TBT  Ultra Short Lehman 20 Plus ProShares  

One way to play the potential for higher yields in long term Treasuries is through the Ultra Short sector fund TBT. This will move up as prices of 20 year plus Treasuries move down and is a two to one leverage play so caution is suggested.