Daily Form October 15, 2009

Inter-market Technical Analysis Using Algorithmic Pattern Detection

THURSDAY OCTOBER 15, 2009       06:39 ET

A comment that I made here yesterday attracted several responses from readers of this commentary.
I mentioned the extraordinarily high correlation between the daily changes in the AUD/JPY cross rate and those for the MSCI Emerging Markets Index (as tracked by the sector fund, EEM).
In my estimation this reveals that the system is leveraging up again sharply as funds are using synthetic proceeds from carry trade engineering to "invest" in the emerging markets.
To say that the world has gone from almost pathological risk aversion just nine months ago to another outright mania for adventurous risk would be overstating matters (slightly).
The chart for EEM shows that the current wave that we are in (and I am not enough of an EWT advocate to even begin to convince you where we currently are in the big count) is almost exactly 1.618 times the length of the first impulsive wave off the late 2008 lows. Whether that has any significance remains to be seen.

Proprietary trading desks and hedge funds are revealing an enormous appetite for Australian dollars as the chart for AUD/JPY reveals.
They also had a similar appetite in the summer of 2007.

In addition to the DJIA breaking above 10,000 yesterday there are other special effects currently being seen in the recovery of the Nikkei 225 which just a few days ago seemed to have broken below major support levels.

Let’s finish today’s abbreviated column with another chart that goes to show that when everyone piles into one side of a trade - being short sterling against the euro - it is almost guaranteed that the liquidity on the other side of the trade evaporates and, the breaks when they come, will be severe and abrupt.