Daily Form February 9, 2009

Detecting Profitable Patterns For Active Traders
Trade successfully without having to be right about the underlying market direction
MONDAY FEBRUARY 9, 2009       06:00 ET

There were several leading technical indicators at work during the earlier part of last week which were suggesting that the market was preparing to rally. One of them which I discussed a couple of times was the new leadership being shown by the Nasdaq 100 stocks (^NDX). In Friday’s trading this index once again showed the way forward with another 2.6% gain.

There are two areas of resistance to overcome - one at the 1300 level which is quite likely to be tested today and another at the reaction intraday high from November 4th in the area of 1380.

One warning signal which is flashing is the RSI reading which is approaching levels where selling should emerge if the range bound rally conditions are still in effect.

It is conceivable that we can break out of that range this week as the market digests the Geithner announcements.

Several times recently I pointed to the developing positive MACD divergence on the charts for the banks and financials in general and also alluded to the flag formation that was developing for XLF. Friday’s rally was not unexpected and there is mounting evidence that the tide may be turning for the financials.

There is a slight warning however which is that the charts for the banks and financials had been discounting a financial Armageddon - which now seems to have passed - but have the charts for other equities discounted enough of a significantly deteriorating backdrop for non-financials?

The Japanese yen is looking like a sell after showing topping out signs as suggested here a couple of weeks ago. Playing the short side can be achieved by using the exchange traded fund FXY.

There is a very interesting article in The New York Times dated February 6th by Floyd Norris.

The author takes a long term look at the S&P 500 and considers some of the least rewarding time periods to have been invested in the market - including the 1930’s and also the 1970’s and comes to the following rather startling conclusion

There has never seen a 10-year stretch as bad as the one that ended last month. Over the 10 years through January, an investor holding the stocks in the S.& P.’s 500-stock index, and reinvesting the dividends, would have lost about 5.1 percent a year after adjusting for inflation

For years the supposedly smart investment gurus - the wise men of finance - along with the large mutual fund companies like Fidelity as well as the Personal Finance pages of the broadsheets were telling us that the right way to approach investment was Buy and Hold.

Now, more than ever one should shun the advice of most of the investment "professionals" and while you're at it you might as well forget the SEC, FSA, government regulators etc. The stark truth is that more than ever we are all on our own and need to retrain our instincts in order to survive and successfully navigate through the financial labyrinth of smoke and mirrors that can easily separate you from whatever wealth you still have.

A number of commentators believe that a new bullish move is beginning and are pointing to several supportive factors. One somewhat esoteric indicator is the Baltic Dry Freight Index, a futures contract which is traded in London and which reflects the anticipated future demand for shipping dry goods (i.e. not oil). The BDI has jumped dramatically over the last several sessions and in harmony with this has been evidence of capital flows returning to Chinese equities.

The Shanghai Exchange (^SSEC) continued to rally in Monday’s trading but the small range session near to a point of chart resistance and with an RSI reading in the 80’s suggests that this may not be a good time to chase this trade.

On a pullback the exchange traded fund FXI could be attractive on the long side. Just how far this rally can go is very uncertain but the market was extremely oversold and with a greater appetite for equities beginning to emerge there is plenty of scope for a sustained and sharp rally in this geographical sector.


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

LPX  Louisiana-Pacific Corporation  

Here is my comment from last Wednesday’s column:

Louisiana Pacific (LPX) could be ready to break away from a basing pattern.

SII  Smith International Inc.  

Smith International (SII) looks vulnerable at the top of an ascending pullback channel.

ZMH  Zimmer Holdings Inc.  

The chart for Zimmer Holdings (ZMH) has similar concerns to that for SII.

ZQK  Quiksilver Inc  

Quicksilver (ZQK) has a bullish pullback channel and has reached likely support where two moving averages have converged.

SNDK  SanDisk Corporation  

Sandisk (SNDK) has risen sharply over the last three sessions on light volume following the heavy volume sell off earlier last week.