Daily Form September 8, 2009

Detecting Profitable Patterns For Active Traders

Successful trading without having to be right about the underlying market direction

TUESDAY SEPTEMBER 8, 2009       05:55 ET

Since Friday’s New York close several markets are now stretching towards extremes and I have the very strong sense that in the inter-market asset class arbitrage game which the large macro traders love to play not all bets can be winners. In fact, if the market performs according to its uncanny ability to sometimes inflict the most harm, it could be that most bets will turn out to be losers.
I shall have have little else to say today but would rather let the charts do most of the talking.
I will point out that gold is now above $1000 per ounce in European trading, the USD is breaking down to a key support level against the Swiss Franc and other currency pairs look about to break or snap back. The Hang Seng Index has managed to rally back almost exactly to the 62% retracement level of 21,300 and the S&P futures in European trading are above 1020.
My strong sense is that things are setting up for some big moves and I want to offer some scenarios which may or may not ever materialize but which are worthy of consideration.
The first chart is a very simple scenario that could unfold on the S&P 500.

I featured the weekly chart for gold recently and I would just echo some previous commentary that I have made and a projection - for the intermediate tern that could unfold.

The Dollar is sliding towards key levels against the Swiss Franc and could take out the baseline of the wedge formation. However the pattern could extend further with the possibility that the eventual breakout when it does come would be to the upside for the dollar. Why do I say that?
If the big moves that are shaping up do unfold the suspicion is that a new attack of financial contagion will have everybody scurrying back to the safe haven status of the dollar...as always. (Except this time they may want to keep some gold as added protection).

The Australian dollar is undoubtedly benefiting from the new carry trade in which the US dollar is being sold as the short leg to finance Australian money market assets and currency as the long leg (based on the notion that the Australian central bank is certain to be one of the first to exit the easing strategy which the Europeans and US reiterated their commitment to at the G20 meeting in London over the weekend).
One has to wonder just how much liquidity there would be for buying the Aussie dollar if there was suddenly an attack of vertigo and hundreds of billions of long AUD and short USD positions had to be unwound in a hurry.