Daily Form May 29, 2009

Detecting Profitable Patterns For Active Traders
Trade successfully without having to be right about the underlying market direction
FRIDAY MAY 29, 2009       04:22 ET

Crude Oil and other commodities are breaking out and this manifested itself yesterday in a move which took the Rogers Commodity Index (RCT) to its highest close in 2009 and also beyond a key resistance level from last November.

With a sloppy bond market, a boom in the Baltic Dry Index and more funds moving back into the hard asset play Chairman Bernanke may need a stronger medication than aspirin for the many headaches to come.


The near term direction of US equity indices remains an enigma wrapped in a mystery to me and I can be easily persuaded that there is a major vacuum below current levels on the one hand, or by plausible arguments that in the algorithmic trading domain that predominates - the rotation strategies are currently showing a tilt towards rally continuation.

As we have seen consumer confidence numbers respond very positively to higher equity prices and one must assume that that is a major strategic objective of the relevant interest groups.

The S&P 400 Midcap index reveals that an overhead barrier has contained prices since early May and that there is a sideways pattern following the violation of the very steep uptrend line through the lows. It seems that the bears are having difficulties gaining traction so it is conceivable that a decisive break up to the 200 day EMA could bring even more of the long only fund managers who are falling behind back into the game.

GDX, which provides exposure to the gold mining stocks via an exchange traded fund, has validated its recent breakout pattern and looks set to build further gains in the intermediate term. Touching the upper volatility band in yesterday’s trading could suggest caution in the near term however.

TRADE OPPORTUNITIES/SETUPS FOR FRIDAY MAY 29, 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

TOL  Toll Brothers Inc.  

Toll Brothers (TOL) has broken down on heavy volume casting another shadow over the housing recovery narrative.



ESLR  Evergreen Solar Inc.  

My call on the solar stocks last week proved not to have been one of my better diagnoses however the chart for Evergreen Solar (ESLR) clearly reveals a bear flag pattern and vulnerability to further weakness.



CRM  salesforce.com  

Salesforce (CRM) faces a clear resistance barrier at $40.



AU  AngloGold Ashanti Limited (ADR)  

AngloAmerican Gold (AU) is echoing the strength for GDX noted above and a target of $50 from early 2008 seems to be on the radar.



EMC  EMC Corporation  

EMC Corporation dropped below all three moving averages on a substantial uptick in volume.

Daily Form May 28, 2009

Detecting Profitable Patterns For Active Traders
Trade successfully without having to be right about the underlying market direction
THURSDAY MAY 28, 2009       06:33 ET

It was not a pretty day for long dated US Treasuries and most especially not for the mortgage backed securities market where rates backed up by an astonishing 45 basis points. The message being sent by fixed income and sovereign debt traders is rather alarming and suggests that the unintended consequences of Quantitative Easing are just beginning to make themselves felt.

The most damage was done at the far end of the Treasury spectrum as revealed by the chart of the Thirty year bond below but a noteworthy jump in yields was seen in the five and ten year maturities as well.

Bloomberg captures the key elements of yesterday’s game changing session as follows:

The difference in yields between Treasury two- and 10-year notes widened to a record on concern surging sales of U.S. debt will overwhelm the Federal Reserve’s efforts to keep borrowing costs low.

The so-called yield curve steepened to 2.75 percentage points, surpassing the previous record of 2.74 percentage points set on Aug. 13, 2003. Yields on 10-year notes have risen more than 100 basis points since Fed officials said in March they would buy up to $300 billion of U.S. debt over six months to drive consumer rates down and lift the economy from recession.

“The markets are starting to grapple with the issue of what happens when the Fed exits and the Treasury needs to continue at the same pace,” said David Greenlaw, the chief financial economist in New York at Morgan Stanley, one of the 16 primary dealers that trade with the Fed and are required to bid at government bond auctions.

Until recently many commentators had been dismissing the alarmist talk about the massive challenges confronting capital markets in financing public debt and claimed that the bond markets and the Fed were dealing with matters calmly and methodically.

Given the nature of the public largesse , and this applies equally to governments in the UK, Ireland, Italy, Greece etc. and even at the state level such as California - the mishaps in sovereign debt markets will become an extreme hazard zone and the wearing of crash helmets is strongly advised.


From yesterday’s commentary

IEF, tracks the 7-10 year Treasury curve, is the inverse pattern to the 5 year yield chart shown above and as indicated previously a failure to rally following the forthcoming auctions would be a disturbing development for public debt financing.

Question is Can Chairman Bernanke navigate his way through a minefield of gotchas? We shall have to wait and see but it is an unenviable task.

Considering the tumultuous developments in the Treasury and MBS markets yesterday the damage done to the S&P 500, as reflected in the SPY proxy was somewhat subdued.

I remain on the sidelines with broad equity index plays at the moment and will be watching for direction from the Treasury and foreign exchange markets.

TRADE OPPORTUNITIES/SETUPS FOR THURSDAY MAY 28, 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

XHB  Homebuilders Select Sector SPDR  

XHB, an exchange traded fund which tracks the homebuilding sector is appearing to discount the effect that higher mortgage rates will have on forward demand for new housing as the technical pattern is giving rise to some concern as a triangular formation is developing with yesterday’s close at a pivotal level.



TBT  Ultra Short Lehman 20 Plus ProShares  

The exchange traded fund, TBT, moves inversely and with twice leverage to the price of 20 plus years Treasuries. In other words it rises with yields and provides a leveraged kicker as well.

This ETF is one of the most efficient ways of playing the short side of the Treasury market and as can be seen this would have been one of the most consistently profitable trades in 2009.

It is often better to stand aside and not chase a market, especially after the dramatic moves of yesterday, but longer term this should be a core holding for a buy and hold investor (assuming that there are still some!).



IYT  iShares Dow Jones Transportation Average  

IYT, an exchange traded fund which tracks The Dow Jones Transport Index is developing an elongated bearish flag pattern.

Daily Form May 27, 2009

Detecting Profitable Patterns For Active Traders
Trade successfully without having to be right about the underlying market direction
WEDNESDAY MAY 27, 2009       03:11 ET

SPY appears to be headed towards a test of recent highs in the region of 93. A successful re-challenge of last Thursday’s failure at 92.8 would be the first step to re-energizing the bullish enthusiasm which has taken this market relentlessly higher since the March low and the real prize in the near term would be to take out the 93.78 intraday high from early January which would also see the index above its 200 day EMA for the first time in a year.

While many investors are now extremely focused on the equities markets the Treasury and currency markets are approaching critical levels as discussed below.


The Hang Seng Index (HSI) surged by almost 5% in Wednesday’s session and almost broke above the 18000 level. Reviewing the longer term charts there is some resistance to overcome in the region between 18000 and 20000 but given the parabolic dynamics in place one cannot rule out 20000 at which there is a much greater barrier of overhead supply to contend with.

As I suggested yesterday my main focus this week is on the Treasury market as there is a massive supply to clear and in particular the 7 year instruments may face the biggest challenge.

The yield on the five year note has broken above an upward wedge pattern and it will be useful to monitor this chart at the end of the week to see if the bearish pattern for Treasury prices is confirmed.

TRADE OPPORTUNITIES/SETUPS FOR WEDNESDAY MAY 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

IEF  iShares Lehman 7-10 Year Treasury  

IEF, tracks the 7-10 year Treasury curve, is the inverse pattern to the 5 year yield chart shown above and as indicated previously a failure to rally following the forthcoming auctions would be a disturbing development for public debt financing.



UDN  PowerShares DB US Dollar Index Bearish  

UDN, which enables one to be long and have a positive payoff if the US Dollar index declines has approached a key test at the peak seen in mid December following the initial announcements by the Fed of its policy of quantitative easing.

Daily Form May 26, 2009

Detecting Profitable Patterns For Active Traders
Trade successfully without having to be right about the underlying market direction
TUESDAY MAY 26, 2009       05:52 ET

The Russell 2000 (RUT) eased by another 0.7% in Friday’s trading and the formation on this small cap index is pointing to the clearest evidence, amongst the broader equity indices, that the rising wedge patterns are slowly coming apart.


Yields on long term Treasuries have moved significantly higher over the last few sessions as the enormity of the deficits and amount of public borrowing required by the US government is beginning to rattle some of the cheerleaders who are methodically pushing the "green shoots" narrative.

The weekly chart below shows how sharp has been the ascent in yields since last December when the thirty year long bond came within a whisker of 2.5%. We have moved up by almost 180 basis points in the last five months and as can be seen we are approaching the 200 week EMA at approximately 4.45%

The Treasury has substantial supply to clear this week and it is quite likely that dealers have been shorting futures to provide a cushion while they take on the new supply and attempt to distribute it to the large institutional investors. If these institutions begin to choke on the abundant supply the consequences for the global bond markets would not be pretty.

UDN, an inverse tracker for the US Dollar as benchmarked against several major currencies has reached a possible inflection point as indicated on the chart below. This represents Friday’s close and since then in European trading- especially in Tuesday morning’s session - the Euro and sterling are re-tracing some of their recent advance.

The dynamics which I have previously outlined here of growing risk appetite and more adventurous allocation to emerging markets and commodities is a negative for the US currency whereas anxiety about the sustainability of the recovery and concerns about the financial climate will tend to be dollar supportive.

If the US dollar has reached an intermediate term recovery level this would add reinforcement to the view that the equity rally may have run its course in the near term.

TRADE OPPORTUNITIES/SETUPS FOR TUESDAY MAY 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

IEF  iShares Lehman 7-10 Year Treasury  

IEF, tracks the 7-10 year Treasury curve, and this is the sector of the yield spectrum where much of this week’s supply from the Treasury will fall.

Reviewing the chart one would expect the 200 day EMA to provide some support to prices but if in fact there are difficulties with the auctions and IEF continues downwards this will be unsettling for the markets.



TAN  Global Solar Energy Index ETF  

Another interesting sector, which can be played via an ETF, involves the solar energy stocks - traded under the symbol TAN. There is negative momentum evidence and the chart suggests that a correction is emerging.



XLY  Consumer Discretionary SPDR  

The consumer discretionary stocks, as tracked by XLY, are looking vulnerable and particularly noteworthy is the strong volumes associated with recent corrective action.

Daily Form May 21, 2009

Detecting Profitable Patterns For Active Traders
Trade successfully without having to be right about the underlying market direction
THURSDAY MAY 21, 2009       06:09 ET

Action in the S&P 500 (SPX) yesterday along with other reflation trading strategies (see discussion below) suggests that an inflection point has been reached with a presumption that an intermediate term top is in place.

The news overnight will almost certainly weigh on US markets today as well. Asian economies continue to show signs of major weakness, European stocks are moving into a corrective mode and S&P has announced a negative outlook on the state of the UK’s finances which is clobbering sterling.

As revealed here before the rising wedge patterns on many charts and the coincidence with the mid May time from 2008 seem rather uncanny.


The chart for the Dow Jones Utilities (DJU) reveals a nasty looking potential breakdown pattern with a bear flag evolving following a break from the triangle.

The chart for UDN which is an inverse tracker for the US Dollar as benchmarked against several major currencies shows the damage done yesterday to the greenback. On this I posted an article this morning at my blog site and which has also been republished at SeekingAlpha .

US Dollar weakness is part of a reflation trade strategy designed to snooker the advance in equities.

Yesterday in particular saw big moves in commodities, commodity based currencies, sterling, gold, emerging market etc which ultimately caused a reversal in US equity indices

The prevailing dynamics for currencies – which are now firmly in place – are that the USD will weaken as risk appetite returns and as all the public sector induced liquidity is channeled into emerging markets and commodities.

On the other hand, the US dollar will strengthen when risk aversion returns – likely to be triggered by another wave of “difficulties” which will damage sentiment for global equities. However that would not be good for paying off all the national debt which would itself not be good for faith in the US currency.

Either way the outlook for the US dollar is what could be likened to a “double-bind” - not pretty



Sterling surged in trading yesterday but in trading on Thursday morning in Europe it is now plunging following a negative outlook from S&P on the UK’s public finances.

Just when it seemed as though things could not get any worse for Prime Minister Brown - with ongoing revelations about MP’s gorging on taxpayer funded expense allowances - they have.

Things could get quite ugly for Brown (and others who live on the Sceptered Isle) as we are now staring at a constitutional crisis and perhaps a crisis in selling gilts. Oh dear!

TRADE OPPORTUNITIES/SETUPS FOR THURSDAY MAY 21, 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

IYC  iShares Dow Jones US Consumer Services  

The chart for IYC, an exchange traded fund which track the Dow Jones US Consumer services sector, is revealing a very similar formation to that seen on the chart above for the S&P 500.



XME  SPDR Metals and Mining ETF  

XME registered a text book case of a doji star formation which takes on added significance as it also straddles the 200 day EMA.

This is another indication that markets are at an inflection point.



GDX  Market Vectors Gold Miners ETF  

Yesterday saw increasing validation for the hypothesis launched here last week

GDX, which provides exposure to the gold mining stocks via an exchange traded fund has approached a potential breakout level. There are also a series of nested cup and handle formations which are bullish.

My only concern is that the volume charts are not revealing an anticipation of a breakout so I would wait for some evidence of highly motivated buyers to emerge.

If the price action does bring in a lot of buyers it could turn into a rather upbeat scenario for gold miners and the precious metal itself.

If my view that yesterday was a key inflection point in the reflation versus equities tussle is correct, then it might be worth watching from the sidelines just a little longer on gold. The anti-Armageddon trading desks will probably want to test the conviction of the yellow metal punters with another nasty sell-off - whether they will get their chance is not obvious.

Either way, if the metal is going to break above $1000 which I believe is increasingly probable in coming weeks (days?) there will be plenty of scope for an exciting ride up with the mining stocks as well.

Daily Form May 20, 2009

Detecting Profitable Patterns For Active Traders
Trade successfully without having to be right about the underlying market direction
WEDNESDAY MAY 20, 2009       03:15 ET

Yesterday was an erratic session although most indices did not cover wide ranges. The S&P 500 proxy SPY in fact has registered a doji star formation after just failing to push above the $92 level.

Volume was below average and less than Monday’s as the markets drift into the Memorial Day weekend.

As suggested yesterday there is a sense that the market seems to be stalling just below the 200 day EMA and, if it had not been for adverse news on new housing starts, there could have been a rally up towards $93 at which point I am expecting sellers to really test the resolve of the bulls.


IWM, the exchange trade vehicle which tracks the Russell 2000, registered another doji star and confronts equal challenges to SPY although the technical condition reveals a slightly more precarious position for the small cap stocks at this stage.

The DAX in Germany managed to peek above the 5000 level intraday yesterday and has recently been revealing relative strength amongst the major European indices. The January 6th intraday high is found just over 100 points above yesterday’s high and a failure to rally back to this level in the face of the 200 day EMA would be a negative technical development.

TRADE OPPORTUNITIES/SETUPS FOR WEDNESDAY MAY 20, 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

XLY  Consumer Discretionary SPDR  

Substantial volume was registered yesterday for the consumer discretionary stocks, as tracked by XLY, and the sector may struggle to move back above towards the 25 level.



DBB  PowerShares DB Base Metals  

DBB, which is an exchange traded fund tracking the price base metals is revealing MACD negative divergence as well as an evolving bearish flag formation



VRSN  VeriSign Inc.  

Verisign (VRSN) has the required characteristics for a bull flag pattern.

Daily Form May 19, 2009

Detecting Profitable Patterns For Active Traders
Trade successfully without having to be right about the underlying market direction
TUESDAY MAY 19, 2009       05:14 ET

There was something rather odd about explanations given for yesterday’s rally, and perhaps the oddest was the massive rally on the Mumbai Exchange which I discussed in yesterday’s column. The result of the Indian election was not that much of a surprise and it strikes me that some commentators were stretching a lot in claiming that the euphoric reaction on the Indian stock exchange could act as such a powerful motivator to lift all other global markets.

Rather I think we saw an absence of sellers yesterday as the bears, I believe, are awaiting the bounce back towards the clear overhead resistance on the S&P 500 at the highs from two weeks and also the 200 day EMA.

This EMA is still following a downward trajectory (even though to use the current jargon its second derivative has declined to virtually zero as it is now levelling out).

The volume on SPY was just about average and I would be very careful on the long side in today’s session if the S&P 500 proxy makes it above 93.


KBE which tracks the KBW Banking Index is also facing a similar challenge to that seen for SPY.

Despite constitutional turmoil, a government which seems paralyzed and a very gloomy economic backdrop the UK’s currency - sterling - is continuing to rally.

However, in harmony with the rest of my current analysis I believe that some traps are about to be set by the bears and I would be looking to sell sterling (or go short FXB if you can borrow it from your broker) at the $1.5650 level.

TRADE OPPORTUNITIES/SETUPS FOR TUESDAY MAY 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

PRU  Prudential Financial Inc  

Good news to report on three of last weeks recommendations. Prudential pulled back to moving average support as suggested last Friday morning and rallied by more than 10% yesterday.



DISH  EchoStar Communications  

A very similar story to the one above for PRU could be said about Echostar Communications (DISH) also has recommended here last Friday.



MSFT  Microsoft Corporation  

Another recent recommendation Microsoft (MSFT) has now rallied back to a critical level where if the bulls really do have the wind behind them, the overhead challenge should be surmountable.

I am sceptical.



GENZ  Genzyme Corporation  

The best looking chart on the long side today that I shall mention is for Genzyme (GENZ) which has a bullish pullback pattern towards moving average support.

Daily Form May 18, 2009

Detecting Profitable Patterns For Active Traders
Trade successfully without having to be right about the underlying market direction
MONDAY MAY 18, 2009       06:38 ET

The Nasdaq 100 (NDX) looks likely to retest the area around 1300 which is just below the 50 day EMA and also coincides with the 62% retracement level within the fibonacci framework which I have been using for the last few months.

Readers may be interested in the following brief article which I posted to the Seeking Alpha site this weekend in response to the suggestion that US Treasury officials are not showing great skill in negotiating commercial arrangements with TALF participants.

The comment was made by a critic of a recent deal between the Treasury and Old National Bancorp that

U.S. Treasury officials’ incentives are not as well aligned with the interests of taxpayers as bank managers’ incentives are aligned with the interests of their shareholders.

To which I responded as follows:

The general point to be made in this regard, and it goes to the heart of the fallibility of having the public sector so immersed in dealing with the financial crisis, is that this type of misalignment of interests is a variation on the Tragedy of the Commons issue.

Treasury officials should be negotiating to get better deals for the U.S. taxpayer and are ultimately accountable to everyone (apart from those who use Swiss bank accounts). However the paradox or tragic irony is, and this is yet another example of the Looking Glass world we are entering, that when something (including accountability) belongs to everyone, it essentially belongs to no-one.


The Nikkei 225 in Monday’s session more than reversed the gain made last Friday and now sits just above the fairly critical 9000 level - having dropped below that level during the session.

A failure, over the next few sessions to re-test the recent intraday high around 9500 - marked by the hanging man/doji candlestick - would strongly suggest that an intermediate top is in place.

One of the most useful charts to monitor in coming sessions, in my opinion, will be for the Euro/US Dollar cross rate. The currency has been moving rather cautiously recently and seems to be attracted to the $1.35 level which also represents the 50% fibonacci level from the swing high and low seen on the chart.

There are ominous rumblings within some of the Eurozone economies about the depth of the downturn and whether or not the EU as a financial mechanism has the wherewithal to provide the necessary safety net should any one of the marginal economies fall off the edge.

On this topic the Hayman Advisors hedge fund which successfully called the sub prime debacle is predicting that several European states could default. I would find that shocking but not totally surprising.

There was much to celebrate in Mumbai today as the recent Indian elections have produced a decisive majority for the Congress Party. Traders could barely contain their enthusiasm for the result and the marketed rocketed by 17% before trading had to be suspended for the session.

The world’s largest democracy is also one of the more dynamic of the BRIC countries and is on my buy list but there should be resistance at the level indicated which shows an area of previous price congestion.

TRADE OPPORTUNITIES/SETUPS FOR MONDAY MAY 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

XLU  Utilities Select Sector SPDR  

XLU, an exchange traded fund which tracks the utilities sector, has broken below key support levels and violated the uptrend line from the March low.



HYG  iShares High Yield Corporate Bond  

HYG, one of the ETF’s which tracks the high yield corporate bond market, after correcting as anticipated here a couple of weeks back is approaching an area where some buying support should be expected.

A failure to find such support would be another factor indicating that equities may be looking at an intermediate term correction.



IYT  iShares Dow Jones Transportation Average  

IYT, which is an ETF which tracks The Dow Jones Transport Index has also broken below the uptrend line from the March low and now faces a test of the 50 day EMA.