Daily Form November 11, 2008

Detecting Profitable Patterns For Active Traders
Trade successfully without having to be right about the underlying market direction
TUESDAY NOVEMBER 11, 2008       07:49 ET

Yesterday’s action was disappointing for equity bulls as very positive Asian price action and firm trading in early European trading gave way to flaccid price behavior at the end of the US session. The S&P 500 gave back 1.3% and occupies, from a technical perspective, a rather nondescript area on the charts just below the 20 day moving average.

I suspect that what we saw was a combination of fading what seemed like bullish news about the Chinese stimulus plan and opportunistic selling in the face of higher prices by hedge funds facing redemptions as they continue the process of de-leveraging.

It is becoming increasingly apparent from the scale of the revised AIG rescue plan announced yesterday, and the fact that there has still been no real “pricing” of the really toxic stuff by the TARP, that the financial engineers that created this monumental disaster were either unintentionally reckless beyond belief or, if the obfuscation was intentional, this must surely be counted as the largest theft ever perpetrated and taxpayers should be demanding ongoing investigations leading to criminal prosecutions.

If we just focus on the more benign interpretation (i.e. that it was not malicious intention) one is forced to the conclusion that the mathematics that underlies all of the risk modeling that went into these structured products is absolutely flawed. Not just slightly wrong but fundamentally mis-conceived.

The saddest part of the whole mess is the hubris and arrogance of the people that signed off on the assessments made by the “quants” of the likelihood of defaults and the probability distributions of financial accidents. Extreme events in time series data are of a completely different complexion to the tails of a normal distribution.

Readers interested in pursuing this theoretical issue further will find discussion of the failure of modern finance to really grapple with quantifying risk in my 2007 book Long Short Market Dynamics

The yield on the ten year Treasury is hovering in the middle of its recent range and sits astride the 20 and 50 day EMA’s. Anticipating which way this will move next is not something that I should be even attempting but the series of higher lows in yields and the fact that with so much evidence of recessionary forces at work it is perhaps revealing that yields are not exploring new lows down in the region of 3.25%.

Prices of sovereign emerging debt, which is tracked by the exchange traded fund PCY, are at a critical level.


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  

I have little to add to the remark that I made last week regarding BAC

One chart in particular illustrates the frustrating nature of efforts to get a rally going in the banks and confirms for me that the problems in this critical sector of the US economy are deep seated. Bank of America (BAC) has been thrashing around over the last three months to get a rally started but I am not convinced that fund managers are convinced that a bottom is, in fact, in place yet.

FDRY  Foundry Networks Inc.  

I was wrong yesterday about the direction of the break away from the triangular pattern in Foundry Networks (FDRY). Fortunately the gap up this time, based upon an acquisition offer from Brocade, also kept me out of the trade as the open was outside my position management margins.

TSRA  Tessera Technologies Inc  

Yesterday I commented that Tessera Technologies (TSRA) had triggered a buy signal from scanning as it matched most of the requirements of an evolving bullish flag pattern. Unfortunately the gap up on the open did not allow the trade to be filled but there may be scope for further advances in the longer term.