Daily Form November 13, 2008

Detecting Profitable Patterns For Active Traders
Trade successfully without having to be right about the underlying market direction
THURSDAY NOVEMBER 13, 2008       07:00 ET

The S&P 500 is hanging on by its fingertips - today could be critical.

If we break aggressively below the previous low from October 10th we should be headed towards the 2002/3 lows again.

Especially worrying are the charts for Citigroup (C), Bank of America (BAC) and Goldman Sachs (GS), all of which are covered below.

Today’s big mystery for me is why did Paulson change his mind about buying all that toxic stuff? Perhaps it was even more toxic than he initially thought it was.

What we are seeing on most charts is the classic downward wedge pattern which characterizes failed rallies in a bear market. We have retreated on the S&P 500 to the baseline of the triangular pattern. If we drop below this today and take out the intraday low from October 10th my guess is that we could be at 800 in a hurry.

Even if we manage a rally here, and as in all bear markets it could be abrupt and very shocking for those short the index futures, the longer term pattern looks so grim that it is hard to avoid the conclusion that fund managers are waiting for much lower prices before they get a real glimpse of the other side of the valley.

The exchange traded fund for the financial services XLF shows that in yesterday’s action we have broken down below the critical baseline of the triangular pattern alluded to above and taken out the October 10th low.

The Russell 2000 (^RUT) out-performed on the downside yesterday with a more than six percent loss and has all but returned to the October intraday low.

Stepping back to the larger picture on the chart, the steepness of the drop since mid September reveals the extent to which massive liquidations of stock by long only fund managers has been taking place over the last six weeks.

In Thursday’s session the Nikkei 225 fell back another five percent and is testing the pre panic low from October 10th. The actual panic low is the one which I have highlighted in yellow.

Some analysts felt that the panic drop down to levels seen 26 years ago could have represented a capitulation event for this market. Unfortunately the recent action seems to refute that diagnosis and the Japanese market panic selling in the latter half of October could, in hindsight, have been the warning signal that further panic selling is probable not only in Japan but also in other global equity markets.


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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C  Citigroup Inc.  

Citigroup (C) has broken decisively below the wedge baseline and closed in single digits. The chart below is very disconcerting for the whole market in my opinion.

BAC  Bank of America Corporation  

Bank of America (BAC) is also now convincingly registering new multi-year lows. When I mentioned above that the overall market is hanging on by its fingertips and could be on the verge of cascading downwards it is to stocks like BAC that I shall be looking in the days ahead for clues as to how deep the chasm ahead might be.

GS  The Goldman Sachs Group Inc.  

The chart for Goldman Sachs (GS) shows a clear sell channel - not even a wedge pattern which suggests that traders have given up on this stock and have not even been attempting to rally it.

This chart is telling us that the entire business model for this company is broken and it raises the question of what Warren Buffet was thinking when he decided to buy into this company at almost twice the level that the stock closed yesterday.

Could this be the shakeout when even the "smart money" no longer looks so smart any more?

RSX  Major Vectors Russia ETF  

The sector fund for Russian equities (RSX) is one of the most dramatically bearish that I can recall.

EWU  iShares MSCI United Kingdom Index  

EWU, which tracks the performance of the MSCI UK index, provides a better perspective on the domestic economy in the UK itself rather than the FTSE which is more exposed to international and resource stocks. The chart below shows that this market also has a rendezvous with the baseline of the wedge pattern discussed above.

APOL  Apollo Group Inc.  

I believe this to be a very high risk environment and apart from my "black box" systematic strategies which are still generating signals I am primarily on the sidelines in discretionary trading activities. One signal generated from my system based pattern recognition which has a more than 60% win/loss ratio is a long signal on Apollo Group (APOL). As a word of caution, and in line with the customary risk disclosure, this ratio suggests that 40% of the time this trade will be a loser.