Daily Form March 31, 2009

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TUESDAY MARCH 31, 2009       06:45 ET

Yesterday’s commentary anticipated the drop in the S&P 500 (SPX) down to the 780 level. While the chart below shows that the critical break down suffered yesterday tips the presumption back in favor of an eventual retreat to lower levels, there are some mitigating factors to consider.

Firstly, the fact that the index managed to bounce exactly off the 780 level and secondly the overall low volumes will restrain me from playing the short side in today’s session.

Turnaround Tuesdays have been in evidence throughout this bear market and one could easily be mounted after yesterday’s rout.

The bearish case would become more compelling if the 766 level (marked on the chart and the intraday low from March 20th) was to break and in general terms if there is evidence that volume picks up on renewed selling in coming days.


The FTSE is recovering in trading on Tuesday morning but while it remains below the 3900 level the chart pattern is suggesting further weakness ahead.

A close above 4060 would be required to turn me more bullish on this index.

The KBW Banking Index (BKX) gave back ten percent yesterday with double digit percentage falls being registered in Citigroup (C), Bank of America (BAC) and Wells Fargo (WFC).

The rupture of the upward trendline from the early March low is certainly a cause for concern but for the many reasons which I have adduced over the last few weeks I would be surprised to see us head back to new lows for this sector.

TRADE OPPORTUNITIES/SETUPS FOR TUESDAY MARCH 31, 2009



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.
For full details on time horizons, risk management and hedging techniques please visit http://www.tradewithform.com

HYG  iShares High Yield Corporate Bond  

HYG, which tracks the high yield corporate bond market has also broken below key trendlines and notably, in this instance, this has been accompanied by a pick up in volume.

Government statistics and anecdotal evidence are pointing to increasing deterioration in many regions of the global economy, with perhaps the US seeing some signs of a respite, but on balance this suggests that default levels on junk bonds will be towards the upper end of the increasingly more gloomy forecasts for this asset class.



MS  Morgan Stanley  

Last Thursday I discussed the topping formations on both Goldman Sachs (GS) and Morgan Stanley (MS). Both stocks have sold off since but the better place to have been from the short side would have been Morgan Stanley.

Notice on the chart below that the volume has been subdued on the sell off and there is support below yesterday’s close at $21 level which coincides with the 50 day moving average.



AXP  American Express Company  

Here are my comments from last Friday’s column regarding American Express

The hourly chart for American Express (AXP) looks over-extended and there is a negative money flow divergence.

There is the potential here for a pullback to the $13 level.

The stock pulled back to the $12.80 level in yesterday’s session and could have delivered a 15% plus return from going short on Friday’s open.



DIG  Ultra Dow Jones Oil and Gas Index  

DIG which tracks the energy sector and is based on the Ultra Dow Jones Oil and Gas Index is moving very much in sync with US equities as revealed in the chart below.

The close was below both the 20 and 50 day moving averages and the triangular pattern is clearly broken.

Once again the volume was light yesterday although the turn down in money flow is more acute in this sector than in many other sector based ETF’s.

Daily Form March 30, 2009

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MONDAY MARCH 30, 2009       05:58 ET

The S&P 500 failed to make any progress above the 833 level discussed here in Friday’s column and I suspect that the next target which almost certainly will be tested in today’s session is the 791 level which was the intraday low from March 25th.

There is potential in today’s session for violation of the upward trendline through the lows and that would be validated if the 780 level fails to lend support. A close below that level today could lead to an abrupt sell-off during the course of this week ahead of the G20 meeting and the employment data due this Friday.


The economic news in Japan seems to be surprising even the most pessimistic forecasters and the weekend news regarding GM and the auto sector in the US has taken the spring out of the recent bounce for the Nikkei 222 (N225).

The 8000 level sees the intersection of two key moving averages and should provide some support in the intermediate term.

The Hang Seng Index (HSI) in Hong Kong gave back five percent of its recent gains and seems destined to test the 13200 level which sees a coincidence of two moving averages.

The Euro is sliding again and, since the $1.32 level has been penetrated already during early trading in Europe the odds favor a re-test of the $1.30 in the near term.

According to a report from Bloomberg one major prop that has given the euro a boost recently has been removed. The downside now looks like a fairly safe bet - perhaps all the way back to the $1.25 level soon.

Citigroup Inc. said it ended a bet that the euro will strengthen against the dollar as pressure mounted on the European Central Bank to follow the Federal Reserve in buying bonds to lower interest rates, a policy known as quantitative easing.

“We are taking off our long euro-dollar trade on the lack of follow-through from the introduction of quantitative easing in the U.S. and the pressure on the ECB to move in the same direction,” analysts led by Jim McCormick, Citigroup’s London- based global head of foreign-exchange and local-markets strategy, wrote in a report today. “We believe that dollar weakness will remain a dominant theme but see better opportunities in other places.”

TRADE OPPORTUNITIES/SETUPS FOR MONDAY MARCH 30, 2009



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.
For full details on time horizons, risk management and hedging techniques please visit http://www.tradewithform.com

CRM  salesforce.com  

CRM could make one further attempt to reach back to its recent high but the MACD and MFI negative divergences are suggesting that this effort could fail.



NSM  National Semiconductor Corporation  

National Semiconductor (NSM) is displaying a bearish configuration in accordance with weakness for the whole semiconductor sector.



SOHU  Sohu.com Inc.  

SOHU has a bear flag pattern and one should now be expecting a retreat towards the bottom of its recent range.

Daily Form March 27, 2009

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FRIDAY MARCH 27, 2009       05:55 ET

The S&P 500 continued to rally yesterday and almost satisfied the target of 835 that I specified in yesterday’s commentary and during a CNBC Europe slot. This level would coincide with a 50% retracement of the 1000 high level and the 666 level as discussed yesterday.

In fact to do the arithmetic precisely would give a value of 833 which was within two basis points of yesterday’s high.

As discussed below I do believe that we are approaching the top of the rally that has been in place since the early March low.

With window dressing for the end of Q1 just around the corner and with earnings releases approaching there is scope for further upside into, what I would consider the danger zone for this most recent rebound - the 850-875 zone - and I would suggest that the chances of a sudden drop are increasing such that stepping aside and retiring profitable long positions is the way to go.

I would not be contemplating short index futures positions at the current time but rather looking for topping out profiles amongst some large cap stocks that have moved very well over the last two weeks and appear to be ready for corrections.


The FTSE in the UK has not been making commensurate progress in comparison to the broad US equity indices and has so far been unable to gain a foothold above the psychologically important 4000 level.

Using similar reasoning to that proposed in yesterday’s commentary it would seem that the fibonacci grid applied to the FTSE suggests that the index has not yet convincingly cleared the 38% retracement level from key swing highs and lows seen during the last several months

If the index fails to remain above the 3900 level in coming days there is considerable downside risk as this would also violate the uptrend line through the lows since early March.

The Shanghai market (SSEC) registered a tiny doji star in Friday’s trading at a potential intermediate term double top.

There is a key support line in the region of 2100 if the expected pullback gains momentum.

In trading on Friday the euro is sliding against the dollar. I have included below an hourly chart for the exchange traded, FXE, which allows easy access to this key cross rate and, as of Thursday’s close in US trading, the currency broke below key moving average support.

A retest of the $1.30 level could be on the cards in coming days.

TRADE OPPORTUNITIES/SETUPS FOR FRIDAY MARCH 27, 2009



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.
For full details on time horizons, risk management and hedging techniques please visit http://www.tradewithform.com

AXP  American Express Company  

As previously intimated, rather than looking at a short position in index futures or the exchange traded proxies such as SPY and QQQQ I would be looking for short opportunities in several stocks that seem to be ripe for pullbacks.

The hourly chart for American Express (AXP) looks over-extended and there is a negative money flow divergence.

There is the potential here for a pullback to the $13 level.



GE  General Electric Company  

In similar vein to the discussion for AXP I would also suggest that after reviewing the hourly chart for General Electric there is similar evidence of poor money flow during the rally of the last few sessions.

This raises the possibility that more volume has been going into distribution rather than accumulation and a feasible price target would be around $9.60 (i.e. at the 200 hour EMA which is the green line on the chart).

Daily Form March 26, 2009

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THURSDAY MARCH 26, 2009       08:04 ET

To begin today I want to take a purely technical look at the S&P 500 Cash Index (SPX) which I shall also be discussing this afternoon on CNBC’s European Closing Bell .

The case can be made that the 1000 level on the S&P 500 is a critical upside possible target which would, if achieved, transform the suitable market nomenclature from one of a bear market rally into one of a new and embryonic bull market. Why 1000?

The closing level on October 14th was 998 and can be considered as the market’s judgment on fair value after the major selling climax in mid October which saw the S&P 500 cover more than 20% in just three sessions.

The 1000 level also marked the very firm resistance levels seen during trading on both November 4th and 5th. Since those two sessions the S&P dropped almost 35%

If we take the low of 666 seen on March 6th and apply a fibonacci grid to the appropriate levels 795 is the 38% retracement level, 835 is the 50% level and 875 is the 62% retracement level.

We are currently between the 38% level and the 50% levels but during yesterday’s highly volatile session, the last hour rescue attempt by the bulls succeeded in keeping us above 795.

I would expect us to head back up to the 835 level in the near term and could see some choppy price action between 840 and 860.

One can even imagine that under a longer time frame - during the next few weeks - the 875 could be challenged but what I would find much harder to imagine is that we can slice through 875 without a serious retrenchment.

Needless to say I am not optimistic that we will be seeing the 1000 level any time soon and, as previously indicated, it is more than conceivable that more financial accidents lie ahead over coming months which could put a re-test of the early March low back in play.


The hourly chart below shows that anyone buying the Five Year US Treasury Note after the QE announcement last week would have been losing money consistently ever since.

In addition the Treasury auction yesterday, which I alluded to in this column, did not go terribly well and adds further supply concerns to the sovereign credit market.

The US Treasury may have its worries about its refunding requirements this year with an estimated $2.5 trillion worth of bonds that need to find buyers but their problems are much less acute than those for the UK government where an auction yesterday for 40 year gilts was under-subscribed.

Coming on the heels of contradictory positions emerging between Prime Minister Brown and the Governor of the Bank Of England, with regard to future fiscal stimulus measures, the UK has to be careful how it steps in the global capital markets. It does not have the benefit of issuing Treasury paper in the global reserve currency as the US does (at least for the time being!) but that’s a story for another day.

Annotated on the chart below for the the Nasdaq 100 Index (NDX) are clear and recurring V shapes that are characterizing the recovery efforts being mounted after each big sell-off.

These formations could also give rise to the notion that a W shaped bottom is evolving although the V in the middle is less convincing that its neighbors.

Another way of expressing reservation about the W pattern is to query what some other analysts are claiming is an inverse head and shoulders pattern and with the accompanying very bullish claim that should we break above the 1300 level we could be headed not only much higher, but also that this would no longer be symptomatic of a bear market rally.

The stakes are quite on how to interpret these patterns as a decisive break above 1300 would seem to be a game changing development. However for now I remain sceptical about this and would suggest, somewhat tongue in cheek, isn’t the head supposed to be larger than the shoulders?

I would be genuinely interested to hear from any readers who feel strongly that I am not seeing the pattern correctly and could post comments on this chart and associated posting on my blog site.

Another chart which is sending out a message that it would be unwise to get too complacent that the bulls have taken control of the agenda is the one below for the S&P Retail Index (RLX).

This index has failed a number of times at the 300 level and as can be seen the 200 day EMA has now moved down more or less to this level. It seems unlikely that - despite the notion that the markets discount 6-9 months ahead of the economy (at least that is the conventional wisdom) the retailing sector is about to be moving back into nascent bull market territory.

TRADE OPPORTUNITIES/SETUPS FOR THURSDAY MARCH 26, 2009



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.
For full details on time horizons, risk management and hedging techniques please visit http://www.tradewithform.com

GS  The Goldman Sachs Group Inc.  

Goldman Sachs (GS) faces a challenge at the 200 day EMA which is very close to yesterday’s closing level. The candlestick patterns of a doji star followed by a hanging man formation as well as the negative divergences on the MFI chart suggest that this stock could be at an intermediate term top.



MS  Morgan Stanley  

The only other Wall Street firm which still loosely resembles the old style investment banks - Morgan Stanley (MS) is also revealing very similar characteristics to those seen on the chart for Goldman Sachs.

I suspect that those who have been buying into the financial recovery story may pause to reflect on how much the underlying business environment has changed for the kinds of activities that enabled both banks to flourish during the 2003-2007 period.

Daily Form March 25, 2009

Detecting Profitable Patterns For Active Traders
Trade successfully without having to be right about the underlying market direction
WEDNESDAY MARCH 25, 2009       03:32 ET

The S&P 500 Cash Index (SPX) stalled after Monday’s surge and the index gave back 2% with a close at 806. Volume across the equity indices was subdued and there would be a risk in over-interpreting yesterday’s pullback in too negative a fashion.

As the chart illustrates the recovery off the early March low has been too much in the form of V shape and to that extent is suspect.

However within the overall context of a bear market rally it seems unlikely that index traders will not be targeting a serious challenge to the 840-860 area which clearly represents a major area of price congestion and resistance.

Amongst the overnight news the following report from Bloomberg caught my eye

Japan’s exports plunged a record 49.4 percent in February as deepening recessions in the U.S. and Europe sapped demand for the country’s cars and electronics.

Shipments to the U.S., the country’s biggest market, tumbled an unprecedented 58.4 percent from a year earlier, the Finance Ministry said today in Tokyo. Automobile exports tumbled 70.9 percent.

The collapse signals gross domestic product may shrink this quarter at a similar pace to the annualized 12.1 percent contraction posted in the previous three months...




After the announcement last week of Quantitative Easing (yes, that was only last week!) the yield on the Five Year Treasury Note (FVX) dropped by an unprecedented 24% in one session.

The chart below reveals that the yield has pulled back since but will soon encounter resumed downward pressure especially as bond prices are going to be supported by actions beginning today as the Federal Reserve will be purchasing Treasuries in the 2-7 year maturity spectrum.



The exchange traded fund which allows one to take an inverse position with respect to the US Dollar Index (UDN) is revealing signs of a bear flag formation as the price moves back towards the 25 level. Despite a lackluster showing by the euro in recent sessions there could be an attempt by traders to focus attention on the world’s reserve currency to coincide with next week’s G20 meeting.

According to a number of news reports appearing yesterday the head of the Chinese central bank is tabling a document for discussion at next week’s G20 meeting in London to examine the possibilities of replacing the US Dollar as the world’s reserve currency. The idea also has support from the Russians according to the article.

The Chinese document may turn out to be just high concept academic waffle but if the idea gains traction it could be really unsettling for Tim Geithner, Ben Bernanke et al.

Daily Form March 24, 2009

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Trade successfully without having to be right about the underlying market direction
TUESDAY MARCH 24, 2009       05:56 ET

The Treasury plan was announced early yesterday and received Mr. Obama’s personal endorsement (it was a bit risky leaving it entirely in Tim Geithner’s hands). The US Treasury revealed that it is becoming one of the world’s largest hedge funds with a new "scheme" designed to give the troubled assets more time in the sanatorium to convalesce. The private partners to the scheme (assuming that they do in fact come in), such as Bill Gross at PIMCO and BlackRock, who might have an astounding six cents per dollar of "skin in the game", stand to benefit with a 50/50 split on any upside, and if things don’t go well - no prizes for guessing this bit - the taxpayer can add another few hundred billion to the tab for rescuing Wall Street.

The good news for the scheme is that there might eventually be some kind of market value set for the troubled assets - the bad news is that the market value will almost inevitably be rigged in the short term and in the longer term, when the deflationary forces have not been so easily re-channeled into burgeoning inflation (that’s still something for us all to look forward to but not for quite a long while yet), the authentic price at which many of the more exotic structured instruments such as CDO squared’s may finally "clear" may be close enough to zero that the taxpayer will have taken a wholly asymmetric risk in this shameful business.

So does the market continue to rally from here? As Keynes once famously said in a different context "Markets can stay irrational longer than investors can stay solvent". I think in the current context the immediate risk is to be on the short side, but longer term the risk is to buy into the asset convalescence myth. In line with the material which I presented last week regarding the bursting of the US banking bubble (also now available at SeekingAlpha ), the recovery path for the US economy is unlikely to be V shaped and to the extent that chart formations in the key markets reveal such V shaped patterns they will be treacherous on the long side.

We are almost certainly heading into a period where bipolar disorder syndrome will be a useful characterization of the way traders react to developments on the TALF, earnings releases, employment data and the trends in global trade and output - which at the moment are heading south at an alarming rate.

My comment from yesterday’s column regarding the likely reaction to the Geithner plan proved to be quite prescient.

The 840 level on the S&P 500 should present a formidable hurdle on the upside which is why I have suggested targeting 825/30 on any initial enthusiasm that accompanies the announcement.

The intraday high on the S&P 500 Cash index was 823.37 and I would certainly be increasingly cautious on the long side if the index moves closer towards 840 today. I would also suggest stalking opportunities on the short side in the ETF’s for the financials as the euphoria subsides.




The European markets seem to have lost the party spirit rather quickly in Tuesday’s session. As anticipated here last week the FTSE 100 Index in the UK almost touched the 4000 level during early trading this morning but since then it has been moving steadily downwards.

A close below 3800 in today’s session would suggest that the market’s belief in the asset convalescence plan announced yesterday is already wearing thin.

With all of the attention being paid to the banks and financials there are plenty of other sectors worthy of consideration. The price of crude is back above $50 per barrel and the Amex Oil Index (XOI) is also showing suggestions that a key downward trendline is being violated.

The risk is that piling into energy stocks purely based on the toxic asset rescue story will set up further sectoral disappointments for some macro-asset allocators as the global fundamentals seem a long way from a sustainable reversal. However there are opportunities in several of the beaten up commodity related ETF’s (see below).

TRADE OPPORTUNITIES/SETUPS FOR TUESDAY MARCH 24, 2009



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.
For full details on time horizons, risk management and hedging techniques please visit http://www.tradewithform.com

DBC  PowerShares DB Commodity Idx Trking Fund  

More than ten percent could have been earned from following the suggestion made here last week that "DBC could be worth a play on the long side as it has the most bullish chart amongst some of the available exchange traded funds in the commodities arena."

Daily Form March 23, 2009

Detecting Profitable Patterns For Active Traders
Trade successfully without having to be right about the underlying market direction
MONDAY MARCH 23, 2009       06:23 ET

The leaks of the Geithner plan to the WSJ and the NYT over the weekend have already allowed many strong opinions to be expressed on the proposals in the blogosphere and in the financial media.

I shall not attempt to capture the flavor of some of the very critical views expressed about the plan - and will wait until after the actual details have been presented before making any comments.

As I have indicated the 840 level on the S&P 500 should present a formidable hurdle on the upside which is why I have suggested targeting 825/30 on any initial enthusiasm that accompanies the announcement.

Mr. Geithner has the capacity to screw this one up so that should also act a warning not to take it as given that the markets will respond favorably in the longer term to the latest effort at "cleaning up" toxic assets. Indeed it is a fallacy to assume that they can be cleaned up - all that will be happening is that the ultimate liability for them will be the public sector - which is pretty much what most astute traders and money managers have realized is already the case.




The Asian markets appear to have got their celebrations in already for the expected Treasury announcements today. In Monday’s session the Nikkei managed a 3.5% gain and the Hang Seng Index in Hong Kong (HSI) burst above the 13250 level discussed here last week and now seems to be headed towards a 62% retracement of the November low and January high.

The Russell 2000 (RUT) retreated in Friday’s session exactly back to the 20 day exponential moving average support and a plausible upside target on this index from the extrapolated trend lines is up to the 470 level.

In a rather erratic trading environment which may unfold over the next few weeks as the markets digest Geithner’s plans, prepare for news from the G20 gathering in London next week, employment data at the end of next week and the beginnings of Q1 earnings releases, there is clear resistance at the 440 level and a realistic chance of a drop back to at least the 50 day EMA at 380.

TRADE OPPORTUNITIES/SETUPS FOR MONDAY MARCH 23, 2009



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.
For full details on time horizons, risk management and hedging techniques please visit http://www.tradewithform.com

XLU  Utilities Select Sector SPDR  

XLU, an exchange traded fund which tracks the utilities sector, has pulled ahead in a sharp V shaped rebound but now looks to be hitting a chart resistance level and the 50 day EMA at $26.



FXE  Currency Shares Euro  

The Euro has retraced 62% of the recent movements from its intermediate term highs and lows and the two doji stars on the chart for FXE suggest a clear uncertainty in near term direction.

Daily Form March 20, 2009

Detecting Profitable Patterns For Active Traders
Trade successfully without having to be right about the underlying market direction
FRIDAY MARCH 20, 2009       07:50 ET

Today I shall be looking at three rather remarkable charts which show correlations between the movements in some key asset classes and I want to tie this into a discussion about the primary reason behind the FOMC’s decision this week to begin Quantitative Easing. In a nutshell the Fed is petrified of a deflationary spiral and the charts below will, hopefully, illustrate why they are right to be worried.

Many have commented on the "lost decade" in Japan and this is usually thought to have coincided with the 1990’s but in fact the case could be made that Japan has lurched from one bout of recession to another for the last 20 years after the spectacular blow off achieved with the Nikkei 225 almost touching 40,000 at the end of 1989.

What is often not realized is just how closely correlated are the movements of the Nikkei 225 and the yield on the US Ten Year Treasury Note. If we select mid-1990 as the base for a comparison and plot the percentage changes in both, the correlation is quite astonishing as the chart below shows. Not only has the trajectory taken by each been one of very high correlation but also the terminal point on the right hand side of the chart is uncannily coincidental. The base period that has been chosen is mid 1990 so as to avoid the final blow off of the Nikkei 225 but even setting the base a little further back does not really change the picture significantly.

What is potentially alarming for the US policy makers is the possibility that US asset prices could deflate in a very similar manner to that seen in the world’s second largest economy Japan. Japanese equities are now back to levels seen more than 20 years ago and that nation’s asset bubble of the late 1980’s has been entirely eradicated.

A convincing case can be made that the Nikkei 225 has been in a bear market ever since. It is this asset deflation on such an extraordinary scale that should keep central bankers, especially in the US and UK, alert to the possibility that a deflationary spiral is extremely vicious and hard to arrest.

In any observed correlation there is no requirement or implication for a causal relationship as what is being measured is a co-movement of changes.

The underlying or independent variable in this correlation would almost certainly be the yield on the US 10 year and to fully explore the relationship between the two would go beyond the scope of this article. What can be said is that the income being paid out in the form of US Treasury coupons has been in a similar downward trend to Japanese equities throughout the entire period and represents the other side of true asset deflation which is that capital has been increasingly incapable of generating sustainable (non speculative) cash flows as a return to investors. In other words the US Treasury has been able to benefit from the most troublesome aspect of an ongoing and structural asset deflation scenario which is the gradual disappearance of reliable and long lived income streams from the employment of capital. The bubbles in the US market since the mid 90’s have produced temporary illusions of asset inflation but now that these have been pierced the true returns to an over abundance of global capital have been revealed as truly elusive.


In the next chart the unusually high correlation between the movements in the yield on US Treasury Notes and the Nikkei is illustrated even more strikingly by inserting another key asset class into the mix - US Banking stocks, as represented by the KBW Banking Index (KBW).

Look again to the right hand side and the terminal percentage position is again quite extraordinary. A different base period was selected because the Banking Index did not exist in the early 90’s and the base selected of mid 1997 corresponds to the Asian banking crisis which many feel marked a key turning point in the development of a more sophisticated and accident prone financial economy.

One could make the case that the entire bubble that is seen in the KBW during the ten year period from 1997 to 2007 - based on leveraged Anglo Saxon financial engineering techniques - has effectively now been deflated and the current position of the banks in relation to the Nikkei and the ten year yields reflects the sober assessment that the balance sheets of the US banking sector have effectively been brought back down to earth after a period of mass delusion as to the value of the assets (primarily real estate) that persisted from the dot com era and through the Greenspan easy money era.

The take away from this chart could be somewhat reassuring in the sense that the worst may now be fully priced in to US banks. There are other indications that the sector is grasping for a bottom and the coincidental terminal point with the other two key variables lends some credence to this notion. However the key variable in the equation - the yields on the 10 year Treasury - could still bring all three variables depicted down to even lower levels.

The third chart retains the two underlying variables for continuity in reference points - the ten year yield and the Nikkei 225 - but added on the chart below is the Dow Jones Industrials Average (DJIA). The base period chosen is mid 1994 which preceded the large run up in the Nasdaq and tech stocks of the 1990’s and which takes us back far enough to gain a perspective on some key levels for the DJIA.

As can be seen from the chart the DJIA has recently come down to levels not seen since 1997 and as the recent dip below the horizontal line suggests this index is currently living dangerously. If the index was to break down below the 1996/7 levels there is more than a theoretical possibility that US equities in general could have substantially further to drop. Not to the same extent as the Banking Index which has converged with the deflation variables but certainly another 20% below the early March levels is a distinct possibility.

What can alleviate this troublesome scenario - in a word inflation and a kick start to the single most worrisome asset class in the whole equation - US residential and commercial real estate prices.

For some thoughts on this matter I shall quote from another article that I wrote yesterday on the reasoning behind the QE move from the Fed this week.

The best way to consider the timing of the QE policy is that it is tied pragmatically to the US real estate market and that the Fed is being encouraged by, and hoping to germinate, anecdotal evidence that the bottom may be in sight and that this is a good time to be providing maximum support to the mortgage origination and re-financing market.

Not just in the US but in many parts of the world, central bankers are now becoming desperate to try to ignite some spark under their property markets. Much more so than even supporting equity markets, central banks know that the most damaging form of wealth destruction (and the evaporation of consumer confidence) is evidenced by the perception that property values remain in free fall.

Will the QE inspired reduction in mortgage rates spark some life into the US property market?

It is highly unlikely on its own to do so because the Fed and other central banks appear to be overlooking the fact that only macro increases in income levels will be able to drive a sustainable recovery path. Residential and commercial property prices/rents are still not genuinely affordable, and will not become so while final demand and levels of employment are declining and, notwithstanding even both of those changing direction, it can be further argued not until the median value of a family home has reverted to a more historically sustainable alignment with median family income.

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Daily Form March 19, 2009

Detecting Profitable Patterns For Active Traders
Trade successfully without having to be right about the underlying market direction
THURSDAY MARCH 19, 2009       06:11 ET

The FOMC surprised the markets yesterday with its implementation of the Brave New World of Quantitative Easing. The Federal Reserve will expand its balance sheet by more than a trillion dollars and will be buying, over and beyond its current substantial holdings, a further $750 billion of mortgage-backed securities, $300 billion of long dated Treasuries, another $100 billion of agency related debt, and an expansion of the eligible collateral to almost certainly include some even more dodgy paper that will be quietly leaked into the market via hedge funds who become private partners in the ongoing financial chicanery that is the TALF.

The implications for the financial economy are far reaching and this was witnessed across the spectrum of asset classes as the charts below reveal.

Will it all work? Nobody knows - but it is a massive gamble and raises the specter of a dollar crisis and an eventual major hit to the Fed’s balance sheet when all of these low yielding Treasuries have to be unloaded into a market in the future where inflation may be a big issue and long dated bonds with 2% coupons will look extremely unattractive.

On to equities and the S&P 500 celebrated the news with an immediate rally after the FOMC statement that took the index above 800. There was a retreat into the close but the mood seems set to endure and the 825 which I have targeted now could be done in the next few sessions.

The long term hourly chart for the SPY proxy clearly reveals how the index has moved back exactly to the level following the gap down (highlighted in yellow) which took place on February 17th. There could be a struggle during today’s session to regain the pre gap levels and assuming this hurdle will be overcome there should be even stiffer resistance in the vicinity of 84 on the SPY proxy which corresponds to the 830 area on the cash index.

Given the rather large implications of yesterday’s move it will be good to re-evaluate the next likely target at the beginning of next week.


The Euro shot up after the FOMC announcement in a move that echoed the move in early December when the Fed dropped the fed funds rate to effectively zero. Clearly some large forex players are sending a clear message to the Fed that they are nervous about the longer term consequences of the new QE policy. One has to wonder whether some of the selling of the US currency yesterday was coming from the Chinese central bank to underline the concerns expressed by Premier Wen last week about his country’s exposure to US dollar denominated Treasuries.

On this topic I have included, for those who may be interested, a link to an article I wrote on this matter which was published recently at SeekingAlpha

Yields on long dated Treasuries dropped dramatically after the FOMC statement and the largest percentage change in yields was seen at the five year maturity with a 23% drop in the yield to 1.5%.

As is evident from the chart below, the clear uptrend which has been in place since the unprecedented basing which took place in mid December has now been thoroughly violated and the FOMC statement makes it pretty clear that yields will be pushed lower as the Fed expands its balance sheet.

TRADE OPPORTUNITIES/SETUPS FOR THURSDAY MARCH 19, 2009



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.
For full details on time horizons, risk management and hedging techniques please visit http://www.tradewithform.com

KBE  SPDR KBW Banks  

The exchange traded fund the KBW Banking Index (KBE) has moved up almost without hesitation since the bottom on March 6th. As the hourly chart suggests there is a lot of price congestion at the 16 level and the traders who have been riding this parabolic ascent may be looking to digest some of these gains.

I was early on calling the momentum bottom for the banks but frankly have been surprised by the strength of the recovery. At some point the large funds will have covered their short positions and then it will be a matter of how large is the appetite from the insurance companies and pension funds for moving back into the banks. They may not be as ardent as some are anticipating.



GLD  streetTRACKS Gold Trust  

One of the most spectacular reactions to yesterday’s FOMC decision was seen in the precious metals, in particular with gold. The ETF which tracks the spot price of the metal, GLD, staged a massive reversal and as the very large green candlestick on very heavy volume suggests there are many traders that are sensing the growing inflationary threat - over the longer term - of the QE policy.

A couple of weeks ago I expressed the view that the gold chart is tracking the evolution of an inverse head and shoulders pattern with a possible neckline break of the $1000 level leading quickly to $1350.

With yesterday’s move the pattern is still unfolding along those lines and even a pullback towards yesterday’s lows would, if not seriously violated, lend further conviction to the pattern.

Daily Form March 18, 2009

Detecting Profitable Patterns For Active Traders
Trade successfully without having to be right about the underlying market direction
WEDNESDAY MARCH 18, 2009       03:56 ET

The rally in equities came back with renewed vigor during yesterday’s session. In the latter part of the afternoon session there were the beginnings of a pullback after the S&P 500 reached back to challenge Monday’s intraday high but the bulls kept up the buying pressure and the index kept moving higher into the close.

It must be said that the last week or so has provided some excellent profit opportunities on the long side with broad indices cooperating with double digit gains but with certain really beaten down stocks providing, in some cases, triple digit gains. It has been a good time to be opportunistic but, as the old saying goes, most of the low hanging fruit may have been harvested already.

Reverting to the S&P 500 charts, the intraday trading pattern is one of a trend day, which is a pattern discussed in detail in my book Long/Short Market Dynamics. The one proviso that needs to be stipulated in regarding to trend days is that they often occur in clusters and it is not uncommon for them to be accompanied by reversal sessions in which the alternate trend comes into play.

I maintain my intermediate term target of 825 for the S&P 500 but would not expect us to get there without some choppy trading as we move into the 800 zone.

Readers may be interested to know that I am now well into the writing of a new book which will be focused on the shortcomings of traditional macro-economics in anticipating and understanding financial crises and how certain insights from the technical conditions of markets greatly enhances that understanding.


In one of last week’s columns I featured the daily chart for the Rogers Commodity Index (RCT) and commented that the descending wedge pattern was still intact and encouraging the view that deflationary forces were still very much in evidence.

Over the course of the last two weeks, along with sustained buying from the bulls with respect to equities (aided by a diminution in the activities of the short sellers), and with many, perhaps too many, starting to talk in terms of getting ahead of the recovery when it comes, there has been a change in the complexion of the chart for a broad range of commodities.

Despite evidence that aluminum and steel are moribund industries at present, the future discounting mechanism that drives markets is pointing to a possible early recovery play in parts of the commodity markets.

The UK’s FTSE seems destined to tackle 4000 in coming sessions but it may run into severe resistance at this pivotal level with many trading desks deciding that this is a good time to book the rather exceptional short term profits that have been available over the last few sessions.

TRADE OPPORTUNITIES/SETUPS FOR WEDNESDAY MARCH 18, 2009



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.
For full details on time horizons, risk management and hedging techniques please visit http://www.tradewithform.com

GMKT  Gmarket Inc.  

Here is one of my comments from Monday’s letter.

Gmarket (GMKT) has an evolving bull flag pattern but could retrace further towards the moving average support.

Purchasing during Monday’s session at or near to the moving averages, or even on Tuesday’s open could have returned more than five percent during yesterday’s session.



AGG  iShares Lehman Aggregate Bond ETF  

AGG, which tracks the iShares Lehman Aggregate Bond Index, seems unable to make any progress and is nestling further into the downward wedge pattern.

It would not be on my short list at present but a further drop below the baseline would suggest further slow price erosion.



ANN  AnnTaylor Stores Corp.  

Ann Taylor (ANN) will be worth monitoring in today’s session for entry opportunities on the short side.



DBC  PowerShares DB Commodity Idx Trking Fund  

DBC could be worth a play on the long side as it has the most bullish chart amongst some of the available exchange traded funds in the commodities arena.