Daily Form September 15, 2009

Detecting Profitable Patterns For Active Traders

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

TUESDAY SEPTEMBER 15, 2009       06:46 ET

Trading in Europe on Tuesday morning is revealing a neutral to mildly negative bias for equities and, albeit in a mild form, a continuing relief in the recent selling pressure on the US dollar.
Sentiment in London has been hit by the governor of the Bank of England’s suggestion that the UK’s path to a "business as usual" recovery is far from assured and this was wrapped up in the hint that rates paid to commercial banks for deposits with the B of E will have to be adjusted downwards. All of which is designed to enable the British to do what they do best - which is to borrow more money.
Meanwhile in the US a lot of attention will be paid to the retail sales report which will be released in a couple of hours and which could enliven the early going after the US equity markets open for business.
There is an expectation that the report will be upbeat as it will include the "benefits" from the sales of clunkers and traders may use this as an excuse to squeeze the stubborn shorts that still refuse to believe that the stock market should be at current levels.
The action later in the session should be more indicative of the near term direction and there is the prospect of more shenanigans before the end of the week when the September futures and options move into expiration.
The Russell 2000 (RUT) finished exactly at the 600 level yesterday and, this is even more remarkable in that this level also coincides with the 50% retracement of the historic high on the chart and the March low.

As previously mentioned Mervyn King, the governor of the B of E, seems to be one of the few central bankers that is willing to deliver bad news and his present warnings about the pace of a likely UK recovery have hit sterling.
The bottom of the green cloud chart on the 4 hour chart is a probable interim level of support around $1.6350.
Readers may recall that from time to time I like to quote from Ambrose Evans Pritchard of the Daily Telegraph who is one of the more apocalyptic commentators on the financial system.
The following comes from a column which can be accessed in full here

Professor Tim Congdon from International Monetary Research said US bank loans have fallen at an annual pace of almost 14pc in the three months to August (from $7,147bn to $6,886bn).

"There has been nothing like this in the USA since the 1930s," he said. "The rapid destruction of money balances is madness."

The M3 "broad" money supply, watched as an early warning signal for the economy a year or so later, has been falling at a 5pc annual rate.

Similar concerns have been raised by David Rosenberg, chief strategist at Gluskin Sheff, who said that over the four weeks up to August 24, bank credit shrank at an "epic" 9pc annual pace, the M2 money supply shrank at 12.2pc and M1 shrank at 6.5pc.

"For the first time in the post-WW2 [Second World War] era, we have deflation in credit, wages and rents and, from our lens, this is a toxic brew," he said.

It is unclear why the US Federal Reserve has allowed this to occur.
"The current drive to make banks less leveraged and safer is having the perverse consequence of destroying money balances," he said. "It strengthens the deflationary forces in the world economy. That increases the risks of a double-dip recession in 2010."

Referring to the debt-purge policy of US Treasury Secretary Andrew Mellon in the early 1930s, he added: "The pressure on banks to de-risk and to de-leverage is the modern version of liquidationism: it is potentially just as dangerous."

The chart below carries on from the theme from yesterday’s commentary that there is evidence that the US dollar has, at least in the near term, pulled out of its recent nose dive.
The 4 hour chart for the USD/CHF shows that the basing pattern is building on the positive momentum divergences.

The Australian dollar is looking increasingly vulnerable against the US currency.
An intermediate term target would be a return to the 0.8450 level.


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 a more comprehensive listing of price formations detected by our pattern recognition algorithms please visit TradeWithForm

XLF  Financial Select Sector SPDR  

XLF, the sector fund for the financials, is revealing some rather obvious divergences. Amongst the many patterns which I noted from scanning the daily charts this morning there were several question marks over banks and financials.

FITB  Fifth Third Bancorp  

Fifth Third Bancorp,FITB, is just one of the financials which seems to be suspended in a no man's land which is not in accordance with the technical conditions displayed on the chart.

PHM  Pulte Homes Inc.  

A head and shoulders pattern appears to be evolving on the chart for Pulte Homes (PHM).