Daily Form October 14, 2009

Inter-market Technical Analysis Using Algorithmic Pattern Detection

WEDNESDAY OCTOBER 14, 2009       06:54 ET

In scanning the charts this morning I was taken by how many - both ETF’s and individual stocks - are showing a pattern where there is a doji star/spinning top followed by a hanging man candlestick. According to traditional candlestick diagnosis this is not a constructive pattern for the long side, but in a market which just seems to want to go ever higher perhaps the rules have changed for interpreting these patterns!
The pattern is also evident on the chart below for the Russell 2000 Index (RUT)

The AUD/CHF pair which I discussed yesterday produced a healthy intraday profit during yesterday’s trading but, as seems to be the case almost every time there is any corrective move by the Australian currency, more buyers rush in to propel it back to loftier levels
I almost hesitate to point out the obvious which is the negative RSI divergence on the 30 minute chart for AUD/USD.

Also gold is revealing some negative divergences. Anecdotally the price of gold for a sterling investor is now within a whisker of its highest value ever. For those interested in seeing the price of gold in several different currencies the following link to a recent article on the subject may be worth a glance.

Germany’s DAX has broken to a new multi-period as this is being written but it would be prudent to follow the slope of recent RSI values during today’s session.


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

HYG  iShares High Yield Corporate Bond  

HYG, which tracks the high yield debt sector, and which took a battering on October 1st (the high volume session highlighted) may have reached the top of its pullback channel.

EWZ  iShares MSCI Brazil Index  

One more chart which has the doji star and hanging man pattern is for EWZ, the exchange traded fund which tracks the Brazilian market.
There is a rather stunning correlation between the AUD/JPY cross rate and the performance of the MSCI Emerging Markets Index, and according to a recent linear regression analysis based on a 40 day lookback, the correlation coefficient is approaching 0.8.
This reveals two things:
1. The carry trade is back in force
2. The new global equities index benchmark appears to be shifting from SPY to EEM.