Daily Form December 8, 2008

Detecting Profitable Patterns For Active Traders
Trade successfully without having to be right about the underlying market direction
MONDAY DECEMBER 8, 2008       06:29 ET

The reaction by equity trading desks to Friday’s very weak employment data should be construed as bullish in the short term for equities. A much weaker number than the consensus forecast was greeted initially by too much enthusiasm by the bears and when the selling started to run out of steam there was a sharp run to cover.

The tip off that the market was about to surprise could perhaps have been surmised in the extreme negative sentiment that has been developing as evidenced by an increasing number of articles and op-ed pieces in the mainstream press that are now talking about a global Depression.

Not that we may not be facing some very ugly developments ahead but bear market rallies can be powerfully unsettling for supercharged bears, and once they get started are likely to bring out the fear of getting left behind amongst those long only fund managers that are nursing the worst returns on equities in a generation.

The S&P 500 (^SPX) has a lot of work to get through the 920-ish area but could cast near term doubts aside and, as already suggested a couple of weeks ago, I would keep the 1000 level on the radar screen.

The dollar looks to be ripe for a corrective phase if the rally in equities continues.

The 38% retracement level on the Euro kicks in at $1.35 although it needs to break away from the pronounced triangular formation that has been evolving over several weeks.

If the markets are right in anticipating that the rapidly deteriorating jobs situation gives the US government the cover it needs to ramp up even more quantitative easing to the ailing US economy, I will be watching for further progress in the European currencies and, at least in the near term, a rest for the steadily mounting Japanese currency.

The Hang Seng Index (^HSI) gapped up substantially in Asian trading on Monday and pulled off a close above its 50 day EMA making it one of the first major global indices to do so.

Follow through towards the 17000 level should be expected before critical overhead supply may rain down on the parade.


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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FXA  Currency Shares Australian Dollar  

A more benign climate for equities, if it is sustained, could allow a slightly more adventurous approach for global capital flows. In such circumstances I would expect to see a rally in the Australian dollar, FXA.

The money flow characteristics and the constriction in the volatility bands suggest that this currency was substantially oversold by forex traders and that an unwinding of contra-carry trade positions is a distinct possibility.

UUP  PowerShares DB US Dollar Index Bullish  

I shall repeat my comments from last week regarding UUP, which represents a bullish viewpoint on the Dollar Index.

There is mounting evidence that the dollar reached a level of quite strong overhead resistance and the bearish flag pattern which was unfolding in last week’s trading appears to have presaged a correction.

XOM  Exxon Mobil Corporation  

Exxon Mobile (XOM) has a price compression pattern just below its 200 day EMA which could give way and lead to an upside surprise move.