Daily Form November 14, 2008


Detecting Profitable Patterns For Active Traders
Trade successfully without having to be right about the underlying market direction
FRIDAY NOVEMBER 14, 2008       04:49 ET

The mid session action yesterday when the Oct 10th intraday low on the S&P 500 (^SPX) was penetrated had many of the characteristics of a classic "fake-out". The early going yesterday was particularly erratic as order flow was being sniffed out for the size and scope of the sell orders. When the selling kicked in there was no obvious precipitating factor and no real struggle by the bulls to support such a strategically significant level. A bear trap was being laid and most traders saw it coming.

Some stop losses were hit and sell short signals were triggered by some of the dumber algorithmic trading programs but volume was subdued and most suspiciously at the same time as this was happening long term Treasuries were selling off.

This is not the pattern that one would expect from a breakdown with conviction.

So should we take relief that a triple bottom is now in place?

Here is what I said in yesterday’s commentary and I still feel that this is treacherous market where sucker breakdowns and sucker rallies are equally dangerous.

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.

Yet another indication that the mid session sell-off lacked conviction and did not result in any real panic based liquidation was the technical divergence between the S&P 500 and the Dow Jones Industrials.

Despite the fact that the October 10th intraday low was being taken out on the most actively traded index futures contract, the DJIA did not retreat to its equivalent level despite continued weakness in the financials throughout the session.

It is to be expected that there could now be some commentators claiming that the market has already discounted all of the worst case global recession scenarios.

For those that believe the full-blown discounting folklore then I have a "V" shaped recovery story that I would like to sell you. Any takers?


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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