Daily Form December 2, 2008

Detecting Profitable Patterns For Active Traders
Trade successfully without having to be right about the underlying market direction
TUESDAY DECEMBER 2, 2008       06:23 ET

The bearish dynamics of descending wedge patterns re-asserted themselves rather brutally again yesterday.

The KBW Banking Index (^BKX) gave back more than 17% in a troubled day for all of the financials. Rejection at the key level indicated on the chart suggests that most of the recent upward progress was a clear example of a "sucker’s rally" that was fostered by the Citigroup announcement from just over a week ago.

Looking at charts for JP Morgan (JPM) and Bank of America (BAC) as well as that for Citigroup (C) suggest that there is still wide spread scepticism that the sector is pulling away from the powerful black hole attractor that has the world’s financial system in its grip.

The main casualty amongst the broader US indices was the Russell 2000 (^RUT) which dropped by almost 12% and seems ready to test its recent low. As suggested here yesterday with 10 year Treasury yields firmly below three percent it would require more cognitive dissonance than normal for investors to be loading up on small cap stocks.

The current degree of uncertainty about the severity and length of the global recession is sure to keep puncturing the trial balloons being launched by even the most optimistic traders.

The CBOE Volatility Index (VIX) performed an important reversal yesterday after piercing below the 50 day EMA in Friday’s shortened session. This index continues to provide useful clues as to macro timing issues.


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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WFC  Wells Fargo and Company  

Wells Fargo (WFC), which is reckoned to be one of the leading banks that is less exposed to toxic waste issues, was still amongst the worst performing banks yesterday and illustrates that the anxiety about the sector is now focusing on concerns about distressed Californian based consumers with home equity loans and small business lines of credit.

HYG  iShares High Yield Corporate Bond  

HYG, an ETF which tracks the high yield corporate bond market is now re-testing lows seen during the late November Citigroup insolvency scare and reveals a complete lack of confidence in this sector of the fixed income market. It also helps to explain why long term Treasury yields are attractive even at almost historically low levels.

IYR  iShares Dow Jones US Real Estate  

IYR, which tracks the Dow Jones Real Estate Index, gave up 20% yesterday and is pointing to a probable breakdown from the descending wedge baseline.