Daily Form June 2, 2009

Detecting Profitable Patterns For Active Traders
Trade successfully without having to be right about the underlying market direction
TUESDAY JUNE 2, 2009       05:53 ET

The S&P 500 Cash index (SPX) attained the 945 target level in yesterday’s rather frothy session. Having pierced above the 200 day EMA and the January 6th intraday high the index came to rest at 943.

The sense is that many asset allocators of the market are now pushing the limits to find where the new normal is in terms of the future economic outlook.

I still sense that there is too much optimism about assumptions for the recovery and the rate of growth which can be expected in coming years and that is why I am still far from convinced that a nascent bull market is emerging.

Yesterday I posted the following reflection.

The major lesson that big financial players learned from the meltdown of October 2008 is that systemic illiquidity is extremely perilous and has to be avoided at all cost.

As machine based trading predominates - with ever more complex algorithms being created - the key to keeping markets liquid is to create the conditions for, both encouraging and exploiting, constant disagreements about the dominant theme or interpretation of the macro-environment.

We should expect rotation through sectors (geographical and economic) and an ongoing propagation of the inflation/deflation dichotomy to drive continuous asset allocation shifts and in turn foster market liquidity.

High frequency thematic rotation, and the holding of assets predicated on this form of pure market timing, is the new bubble. Value is not created by market timing, I would maintain, only transferred.

There is one theme which I am confident about which is that, unless we get another major leg down to the rolling financial crisis, the bull market in US Treasuries which carried from the October 1987 crash until December of 2008 is over.

Yields on the five year note saw the largest relative jump yesterday and I would expect that as long as traders in equities and commodities continue to push the reflation agenda the market’s focus will move increasingly towards the shorter term securities, in particular 2 year notes.

Perversely the rates on short term bills are declining significantly at present - which I don’t believe is a positive for those claiming boldly that risk aversion is behind us.

The chart below is a weekly chart for the Hang Seng Index in Hong Kong (HSI). Superimposing a fibonacci grid over the historic high from October 2007 and the most recent low it can be seen that the closing price in Tuesday’s session (which saw a 2.6% decline) is almost exactly at the 38% retracement level.

As discussed last week I would be very surprised to see this index slice through the 20,000 level without a corrective episode.


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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FXB  Currency Shares British Pound  

FXB, which allows access to sterling against the dollar via an exchange traded fund, is reaching up to levels where the reward/risks on the long side would seem to be unattractive.

DBC  PowerShares DB Commodity Idx Trking Fund  

One other ETF which would appear to have attained a strategic target in yesterday’s trading is DBC, which tracks a broad basket of commodities.