Daily Form January 16, 2009

Detecting Profitable Patterns For Active Traders
Trade successfully without having to be right about the underlying market direction
FRIDAY JANUARY 16, 2009       04:10 ET

The bears took control of the agenda from the beginning as indices headed down towards the recent lows. The DJIA pierced below the psychologically important (but not technically important) 8000 level and the Nasdaq 100 seemed to be destined towards the $27 level that I discussed in yesterday’ column. Then we got a rather abrupt reversal and the enthusiasm of the Armageddon merchants came to a grinding halt and a period of major short covering ensued.

The 15 minute chart of the QQQQ reveals a rather impressive example of one of the best technical indicators that really has value when the market is exploring extreme levels. The arrows on the price chart and the MACD reveal a classic positive divergence.

As Monday is a public holiday in the US, and with Citigroup(C) making a major announcement today (which may have been largely priced in already) and traders having to digest the overnight Bank of America news, it would not be surprising to see further erratic trading today.

The KBW Banking Index (^BKX) produced a new multi-year closing low yesterday. As suggested earlier this week I will be watching for positive divergences on the end of day and intraday charts for XLF in coming sessions as the news flow gets more apocalyptic again.

If I was the PR advisor to a CEO or Chairman of any major bank I would be urging them to get their apologies on record soon. If the "bad bank" policy (i.e. the creation of a taxpayer funded repository for all of the gee-whiz securitized products) gains traction, the valuation of all those ingenious products of the financial engineers will really show off in a staggering manner just how massively the banks miscalculated and mismanaged their risks.

Culturally, the dissonance that is arising as we are all asked to stomach all of the bail-outs is becoming more and more of an awkward problem for policy makers.

The average citizen both in the US and in Europe is finding it harder and harder to justify the massive salaries, corporate jets and massive bonuses that were paid out to bankers. The profound inanity of these bankers will become even more apparent when the magnitude of the potential public liability from having to underwrite the so-called "toxic assets" is revealed.

The CBOE Volatility Index (VIX) has moved up steadily over this week and now exceeds the 50 day EMA. It is remarkable how this index turned almost exactly at the 200 day EMA level of 40 but it is fair to say that the acceleration being seen is not of a similar scale to that seen during the fall.


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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TMO  Thermo Electron Corp.  

Thermo Fisher Scientific (TMO) has had two very positive sessions and, given the breakout from the ascending wedge pattern, now seems set to take on the upside target indicated on the chart.

VZ  Verizon Communications  

In Monday’s column I noted that a bear flag is evolving on the daily chart for Verizon Communications (VZ). Opening a short position on Tuesday’s open could have delivered a more than ten percent return in just two days during yesterday’s session.

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