Daily Form October 27, 2009

Inter-market Technical Analysis Using Algorithmic Pattern Detection

TUESDAY OCTOBER 27, 2009       06:34 ET

The divergences to which I alluded in yesterday’s commentary - primarily involving the US equity market - caused an anxious market to sell off rather abruptly in the early going. While those more persuaded of the need to find a fundamental or news related item to explain such market movements were attributing the drop to bank downgrades and intervention in the forex market, the growing technical divergences have been evident for all to see for some time.
Although I did not see Nouriel Roubini’s appearance on CNBC’s Squawk Box I did catch some of the edited clips and I think he spelled out well the precarious nature of the "mother of all carry trades" theme.
As Roubini suggested the irony that equity traders now face is that the worst development for global equities would be a strong dollar.
The intraday chart for the S&P 500 highlights the sell-off which must have sowed some seeds of doubt for some of those propagating the Panglossian spin on recent macro-economic/financial developments. The possibility of a repeat performance of the July 2007 abrupt unwind in the carry trade might induce them to re-examine their cornerstone premises if the US dollar no longer cooperates by dropping every day.

Sometimes a picture is worth a thousand words and that applies to the carry trade phenomenon. Several readers of this column have asked about the carry trade and why it is becoming an increasing part of my focus and the chart below may help to throw light on the matter.
Incidentally the course which I shall be presenting in London in late November in conjunction with Thomson/Reuters (details are available at the link at the top of this commentary) will include an in-depth look at the influence of the carry trade on global capital movements and asset allocation.

Another factor behind the "unusual" movements in the markets yesterday, highlighted by a resurrection (even if it may be short-lived) of the US dollar, was the move up in yields across the entire Treasury spectrum.
As discussed here a week or so ago the five year maturity may be the best to monitor as it moves further into a pronounced triangular formation.
A surprise break out to the upside on yields, which might be a requirement for the pressure now being put on the US administration by those holding trillions denominated in the global reserve currency, would apart from strengthening the dollar also not be favorable to US banks operating their own more domestic version of the carry trade - i.e. riding the yield curve.

The KBW Banking Index (BKX) is living somewhat dangerously and as the trend lines drawn suggest it is quite vital that it finds support near current levels.


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


As previously discussed in relation to the KBW Banking Index, one would expect the current price area to offer some support, and the exchange traded fund, KBE, provides a vehicle for an immediate term opportunity on the long side.

IEF  iShares Lehman 7-10 Year Treasury  

IEF, is a fund offering from iShares, which tracks the price on the 7-10 year section of the US Treasury yield curve and thus moves inversely to yield. The fund dropped below its 200 day EMA level yesterday on increased volume.

UUP  PowerShares DB US Dollar Index Bullish  

The exchange traded fund which represents a play on the upside possibilities for the US dollar index, UUP, is revealing some positive technical divergences. But having said that it has been doing so for several weeks and still seems to have the buoyancy of a lead balloon.

GDX  Market Vectors Gold Miners ETF  

GDX, which tracks the gold mining sector, is approaching a price zone where the long side would be worthy of consideration.