Daily Form August 25, 2010


Inter-market Technical Analysis using algorithmic pattern detection


WEDNESDAY AUGUST 25, 2010       11:00:00 GMT




It seems that almost every commentary and item of financial analysis that I came across at present is talking about metrics of historic proportions. To cite just a few examples


  • Yields on 10 year UK gilts and 10 year bunds are at their lowest ever.
  • Yields on 2 year US Treasury notes are at their lowest ever
  • The yen is registering highs against the US dollar not seen for at least 15 years and the highest level in 9 years against the euro
  • Debt to GDP ratios in many major economies including Japan, the US and UK are at their highest peacetime levels
  • Existing home sales, as reported yesterday in the US, are at their weakest level since 1995


And I could go on.

Perhaps the best (and most ominous) chart I can show today is the 20 year perspective on the Nikkei 225 as seen below. The index fell by another 1.7% in Asian trading but that is small change when considered to the almost 80% drop that this index has seen since the last trading day of 1989. When commentators talk about the possibility of a Japanese style deflation experience for some of the "old economies" it is worth keeping this chart in the mind’s eye.



The S&P 500 futures are currently trading in Europe within the confines of yesterday’s fairly extensive range. We should find out possibly today whether the "blip" below the 1040 level needs to be tested before any kind of relief rally can be mounted or whether the bears really are in the driving seat and ready to move into high gear.



The Russell 2000 came within 3 points of validating the comment made here this week that 585 was a near term target. The doji like candlestick is intriguing, but could well be indicating hesitation about how well lower levels have been robustly tested rather than a conviction that a rebound is now the path of resistance.




The call made here on Monday regarding AUD/CHF was timely and the suggestion is that even lower levels seem likely in the medium term. I have used the arrow to point to exactly the critical weakness point in the technical picture which was the failure to make it up into the overhead cloud formation following the break below the trend-line. Foreign exchange markets are relatively easier to discern with these kinds of patterns than the more algorithmically driven equity markets.

I just want to make reference to the trade setup which I discussed in yesterday’s column regarding CHF/JPY and how qualifications should always be made in regard to specific levels targeted. At the time of writing the pair seemed as though a move up to 81.40 would precede the move down that was anticipated. Soon after the newsletter was published the pair actually went down almost exactly to the 80.40 level without any rally up towards my proposed entry level of 81.40. In such circumstances the setup should be disregarded and not enacted after the initial target has been achieved.


Daily Form August 24, 2010


Inter-market Technical Analysis using algorithmic pattern detection


TUESDAY AUGUST 24, 2010       10:56:00 GMT




The big event in European trading this Tuesday morning (so far) occurred just after 0700 GMT when USD/JPY dropped almost 100 pips and bounced just before hitting the 84 level. This puts the yen at a multi-year high against the dollar - a fact that reflects the unease which is also keeping the yields on several key government bond benchmarks, including the 10 year bund, at or near historically low levels.

In overnight trading the Nikkei dropped and then closed below the 9000 level and this gives rise to a real possibility that there will be concerted action from the BOJ and other central bankers to try to "manage" the situation as things could get rather ugly from here on.

S&P 500 futures are trading at present down below their close yesterday at 1056.

With one week remaining in August and US equities also sliding downwards the chart for the Nasdaq 100 looks in some ways the most vulnerable and a drop to 1750 could be a realistic target if not before Labor Day then soon afterwards.



The technical pattern on the 60 minute chart for USD/JPY is a classic break from a downward wedge pattern and since we are now in uncharted territory on this key exchange rate it would take a braver man than me to guesstimate where we go next. Clearly the BOJ will be watching developments closely and trading this pair at present is high risk in my opinion.



GBP/JPY looks set to revisit the 128 level which was seen in May in the aftermath of the wonderfully prescient "flash crash" event.



When considering two safe haven currencies, the yen and the Swiss franc, the chart below for the cross rate highlights the extraordinary strength that the yen has at present. The 240 minute chart below especially illustrates the recent topping pattern of the Swiss currency and its inability to break above 83.
Similar concerns about central bank intervention would apply to trading this currency pair right now, but it would be tempting to make a short term trade of selling CHF/JPY at the 81.40 level with a stop at 81.90 and a longer term target at 80.40 (with scaling out of the position as an appropriate tactic).






TRADE OPPORTUNITIES/SETUPS FOR TUESDAY AUGUST 24, 2010


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





AAPL  Apple Computer Inc.  

Several individual stocks caught my attention from the TWF daily scanning routines and are worthy of consideration with the qualification which should always be made, that these are not specific recommendations for today's session but rather indicative of broad patterns which may bear fruit in coming sessions.

AAPL triggered an Ichimoku signal yesterday, which can be an early indicator of impending weakness, based upon the Tenkan Sen line crossing the Kijun Sen line from above. More details about this pattern are available to premium subscribers along with other useful clues provided by technical pattern analysis.





ALTR  Altera Corp.  

Altera has a clearly visible bear flag pattern which could be on the point of breaking down and the close dropped below the cloud formation.




AMCC  Applied Micro Circuits Corporation  

AMCC also has a well defined bear flag pattern.




RS  Reliance Steel and Aluminum  

One of the patterns which I scan for pays attention to those stocks which have volume which is greater than 1.2 times the 15 day moving average of volume but less than 1.5 times the average volume. These stocks could be at an inflection point and getting ready to make a decisive directional move.

Reliance Steel (RS) fits the above description and also dropped below the cloud and looks ready to revisit the recent low.




TK  Teekay Shipping Corp.  

Teekay Shipping (TK) also fits the volume characteristics described in reference to RS and also dropped out of a cloud formation.

In this case with the 200 day EMA lying less than a dollar below yesterday's close I would be inclined to wait for a rebound before looking on the intraday patterns for a suitable entry on the short side. If such an entry doesn't present itself then be prepared to move on and look at other opportunities.



Daily Form August 23, 2010


Inter-market Technical Analysis using algorithmic pattern detection


MONDAY AUGUST 23, 2010       10:08:00 GMT




Equity markets appear to be hanging on by their finger tips to fairly critical levels. No where is this more true than in Japan where the Nikkei came within 90 points of the key 9000 level in Monday’s trading.
The index closed at its lowest level since last November and I will repeat my comment from Friday’s newsletter that a clear break below 9000 could be a watershed event for global risk appetites



I am still of the view, despite the intriguing hammer formation on the chart from Friday’s session, that the Russell 2000 looks vulnerable to a test of the 585 level.



EUR/USD is trading below $1.27 in European trading and on the daily chart has now entered the cloud formation. The annotated break of a key trend-line suggests an eventual testing of the base of the cloud formation which means we could see $1.2450 in coming sessions.



I shall be looking for suitable entry levels on the short side of AUD/CHF in today’s trading. The chart suggests that there is a relatively attractive longer term position play by selling the Aussie dollar against the Swiss franc on any significant rallies of AUD.






TRADE OPPORTUNITIES/SETUPS FOR MONDAY AUGUST 23, 2010


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





XOP  SPDR Oil and Gas Exploration  

Here again is my comment on XOP from Friday's commentary


XOP, the exchange traded fund for the oil and gas exploration sector, has dropped below the cloud formation and other technical weakness suggests lower prices ahead.

For premium subscribers there is a daily listing of key ETF's and equities which have made significant moves in relation to many key technical indicators, including those which have dropped out of Ichimoku cloud formations or emerged from such clouds in an upward direction. Notably at the moment there are very few instruments which are emerging upwards from such clouds apart from inverse ETF's.





IDX  Market Vectors Indonesia ETF  

IDX should be monitored for evidence of a third lower high.




IXN  iShares S and P Global Technology  

IXN, a sector fund which tracks global technology stocks may struggle to regain a footing within the cloud formation and will be on my watch list for this week for a possible drop down back to the early July level indicated on the chart.



Daily Form August 20, 2010


Inter-market Technical Analysis using algorithmic pattern detection


FRIDAY AUGUST 20, 2010       11:22:00 GMT




In Friday’s European trading session equities are sliding with both Germany’s DAX and the CAC40 in France down by more than one percent as fears about Greece and other EU sovereign credits are pressuring EUR/USD, which has also just cracked below the $1.27 level. The S&P 500 futures have also broken below recent intraday lows and reached below the 1063 level suggesting that, when trading opens in North America in a couple of hours, we may well be headed down towards the 1050 level which represents a key Ichimoku level on the daily chart.

I have included the chart for the KBW Banking Index (BKX) below to illustrate the point of failure for the rally that appeared to be setting up for a summer rally for this sector. The peek above the trendline and the Ichimoku cloud base, once reversed, has set in motion a highly probable re-test of the February low for this index. If we don’t see institutional buying support around this level, this will provide another nail in the coffin for the deteriorating outlook for equities in general.



The Russell 2000 Index (RUT) also looks technically weaker than the S&P 500 and the 585 level would seem to be a feasible near term target. RWM can be used as a proxy for the short side on this index.

As always there is the proviso that inverse ETF funds are useful for near term position taking with respect to the instruments that they short, but over the longer term, due to the manner in which they are constructed there is a tracking error which means that holding a long position in an inverse ETF will not match the gains from being outright short that same instrument.



Since starting to put this edition of the newsletter together the euro has broken below $1.27 and sterling has cracked the $1.55 level. Since it is a late August Friday with relatively thin trading conditions it would be rash to reach any premature judgments, but both levels are key for the longer term outlook and if we should close out the week with EUR/USD below $1.2740 and sterling below $1.55 this would not only suggest that the tide is turning against these key European currencies but also suggest that the likelihood of a more invigorated US dollar is increasing, perhaps as a corollary to further risk aversion if the retreat in equities gathers pace.



USD/JPY is behaving relatively quietly during Friday’s European session but should be monitored later today for a possible close below the 85 level. If we do close the week with a notably stronger yen then the outlook for the Nikkei in Monday’s session becomes fairly critical as that index closed down almost 2% in Friday’s session and just below the 9200 level.

If the Nikkei drops below 9000 that would be another watershed event which would not be favorable to the already deflated animal spirits.






TRADE OPPORTUNITIES/SETUPS FOR FRIDAY AUGUST 20, 2010


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





IBB  iShares Nasdaq Biotechnology  

IBB, one of the sector funds which tracks biotech stocks, revealed technical weakness yesterday on a pick up in volume. In addition to the break below the recent trend line the sector broke below both the 50 and 200 day EMA's and has also entered the pink cloud formation suggesting an increased likelihood of an eventual visit towards the $76 level seen in July.




XOP  SPDR Oil and Gas Exploration  

XOP, the exchange traded fund for the oil and gas exploration sector, has dropped below the cloud formation and other technical weakness suggests lower prices ahead.

For premium subscribers there is a daily listing of key ETF's and equities which have made significant moves in relation to many key technical indicators, including those which have dropped out of Ichimoku cloud formations or emerged from such clouds in an upward direction. Notably at the moment there are very few instruments which are emerging upwards from such clouds apart from inverse ETF's.




PRU  Prudential Financial Inc  

Prudential Financial is acting poorly and may find some support at $52 as indicated by the dotted line. However given the possibility of extended weakness in the financials a failure at this level would suggest another four/five dollars of downside.




IYF  iShares Dow Jones US Financial Sector  

In line with my comments above regarding the key levels from February which are now being approached for the banking sector as well as the micro caps, IYF, which tracks the Dow Jones US Financial Sector Index, should be appealing around the $48 level, provided that long only managers are not yet prepared to throw in the towel.




SNDK  SanDisk Corporation  

SNDK looks to be headed to an eventual test of the 200 day EMA around $36 after dropping out of the cloud on twice the recent average daily volume.



Daily Form August 18, 2010


Inter-market Technical Analysis using algorithmic pattern detection


WEDNESDAY AUGUST 18, 2010       11:53:00 GMT




The fact that the S&P 500 has not sold off following the very weak data released recently, and some widely publicized technical divergences, is confounding many of those who were getting aggressively short following the sell off a week ago.

The failure to break above 1100 yesterday was perhaps a minor setback but as we drift towards Labor Day in the remaining hazy days of the summer (not in the UK where summer occurred on July 22nd to be exact) there could well be a tendency to move up to the top of the cloud formation on the daily chart.

As can be seen, given the way that the cloud formations are a forward projection of past data, the top of the cloud has shifted from the very flat top at 1130 which persisted for some time towards the 1110 level which is little more than 2% from current levels.

1130 would still pose a formidable overhead barrier, if we can penetrate the cloud, but it is also worth considering a further target which I have cited previously, which is around 1170 which was the "bounce" level following the May 6th sell off, and which from a technical perspective would be in need of testing and surpassing in order to add conviction behind a longer term positive outlook for this index.

I still remain wary of a less hospitable environment for equities as we move beyond Labor Day and approach Q4.




Following similar reasoning to that proposed above for the S&P 500, the 5436 level represents a target for the FTSE in the UK which not only corresponds exactly to the level seen following the early May bounce but also the 62% retracement of the 2010 high and low which are visible on the daily chart below.



GBP/USD is rallying at the time of writing but faces a trend line of resistance close to 1.5680. Should it make it beyond that level there would be stronger resistance from the 240 minute cloud formation at 1.5740.

The support level indicated on the chart at 1.5460 held during yesterday’s slide but a failure to break above $1.5740 would suggest another more forceful testing of this support line. As suggested here last week, the $1.52 level would seem ultimately to be an area of stronger support but sterling is tracking the euro closely and the immediate technical outlook for EUR/USD is not easy to discern.



The Bovespa Index in Brazil is making a valiant effort to recover the ground recently lost but in so doing could be in the process of developing a bearish flag formation with vulnerability at the 69,000 level.






TRADE OPPORTUNITIES/SETUPS FOR WEDNESDAY AUGUST 18, 2010


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





CHFJPY    

CHF/JPY remains within the cloud on the daily chart below with a lot of resistance to overcome between 82 and 83, while the larger picture still remains one where further yen strength against the Swiss currency seems likely.




EDV  Vanguard Extended Dur Trs Idx ETF  

The exchange traded fund EDV, which represents a play on long term Treasury prices, shows two "island" candlesticks which may be left stranded in the near term. The large volume yesterday highlights the fact that there is a lot of market activity involved in yield curve maneuvers, and the almost uninterrupted increase in prices at the long end of the curve recently may well be setting us up for a corrective move. Another method of exploiting any short term uptick in yields would be to take a long position in TBT.




EWT  iShares MSCI Taiwan Index  

EWT, an exchange traded fund which tracks Taiwan's equity market, registered a gravestone doji candlestick yesterday and this geographical sector is highly correlated with semiconductor performance which, despite a slight recent rebound, still looks technically weak.




IDX  Market Vectors Indonesia ETF  

Here again are my comments from the newsletter dated August 4th


In the developing markets, inflationary pressures are beginning to create a tighter monetary environment which is having a spill over effect on equities.

IDX, is a geographical sector fund for the Indonesian market, and as the chart shows this market sold off hard on heavy volume as recently released economic data is requiring the central bank to stay ahead of the inflation genie, which once it emerges from the bottle is hard to get back in. However this is a difficult juggling act as increasing short term rates could also spook a lot of the adventurous capital which is flowing into its equity markets.

I would suggest that the fund could be vulnerable to another drop, but would wait for entry until a pullback towards the recent high has taken place.





AUDUSD    

AUD/USD is moving further into a large frame triangular formation on the 240 minute chart and the overhead resistance from the descending front of the cloud formation is tilting me in favor of a break to the downside when the pattern resolves itself.



Daily Form August 13, 2010


Inter-market Technical Analysis using algorithmic pattern detection


FRIDAY AUGUST 13, 2010       06:37 ET




During my two day absence the complexion of the equity market has deteriorated substantially with Wednesday’s sell off leading to violations of some key uptrend lines on many sector funds and indices.

The S&P 500 broke through key support levels at 1093 and 1085 but the futures managed a "bounce" off of the 1070 level which saw the cash index hold above 1075.

At the time of writing the eMini futures are trading with a negative tone and the September contract is hovering in the vicinity of 1080 after failing to break above 1090.

The outlook for the remainder of the year is not constructive and a break below the previous recent low of 1013 (also the 38% retracement level discussed here on Monday) could create a downward price cascade.

My expectation is that the base of the cloud and the 1050 level will need to be tested soon. Depending on whether or not there are signs of any accelerated institutional liquidations, the bulk of the trading for the remainder of August is likely to be almost exclusively in the domain of algorithmically driven strategies (it is most of the year anyway but more so in August) and this might have a slightly moderate bias which could still produce a surprise visit up towards 1130 again.

For latter September and Q4, I suspect that the headwinds of deflationary pressures will prove too strong and the bears will take control of the agenda.



All of the yen crosses got crushed in Tuesday’s and Wednesday’s session which echoed my warning here on Monday regarding EUR/JPY and CHF/JPY.

The technical pattern which had been developing for CHF/JPY during July was clearly pointing to an impending slide of the Swiss franc against the yen and there were even worse technical conditions for EUR/JPY and GBP/JPY as I have previously observed.

Substantial profits have been earned over the last 72 hours from favoring the short side of these crosses, and I hope that you will have taken the recommendations on the recent occasions -including Monday - when I have drawn attention to this.



The uptrend line for EUR/USD has been critically broken on the 240 minute chart below and there is now clear overhead resistance at $1.3150 and I would not be surprised to see $1.2740 - the level indicated on the chart - in the coming days.



The technical picture for GBP/USD looks as dire as that for the euro and the two most notable features on the chart, apart from the upward trend violation, are the failure at exactly the $1.60 level and the absence of any real price support until the $1.52 area, although there is minor support around $1.5450.

On the EUR/GBP cross the 82 level is being tested this morning in Europe as it was in yesterday’s session. There was an aggressive amount of cross rate trading at this level yesterday but 82 held and was followed by a sharp recovery as the euro retained its poise against sterling. Expect the level to be tested vigorously in coming sessions and a break below 82 would be a bad omen for the euro, especially given the fact that sterling is acting poorly as well.






TRADE OPPORTUNITIES/SETUPS FOR FRIDAY AUGUST 13, 2010


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





ACWI  iShares MSCI ACWI Index  

ACWI failed to break above the level I discussed here as indicated by the arrow on the chart, which was the bounce level following the May 6th plunge.

As with many indices the MSCI World Index gapped down substantially on Wednesday and now faces a potential visit to test the base of the cloud formation.




KRE  SPDR KBW Regional Banking  

Here again are my comments from my Daily Form commentary of July 22nd.


Perhaps as a foretaste for what lies ahead for the banking sector and XLF as just discussed, can be seen in the daily chart for KRE, a sector fund which acts as a proxy for the regional banking sector. Yesterday KRE broke to a new multi-period closing low and almost touched the level seen in the May 6th "flash crash".
I am reminded of all of the skeptics who claimed that the May 6th low was an aberration and of all the misguided chatter about "fat finger" traders etc. It turns out that the intraday prints on the ETF charts from May 6th have been extraordinarily prescient in anticipating where certain sectors were headed.





XSD  SPDR Semiconductor ETF  

On August 2nd I noted that XSD had one of the least favorable technical patterns of the major ETF's and the semiconductor sector has been hit hard over the last few sessions.
On the weekly chart the $36 level would seem to be a feasible target for position traders looking at the longer term horizon.




DBV  PowerShares DB G10 Currency Harvest  

The sector fund DBV, a proxy for the FX carry trade, shows that this is not the place to be when risk aversion moves to the foreground.




HGX    

The Housing Index (HGX) has clearly broken loose not only from its recent uptrend but even below the daily cloud formation suggesting that even a consolidation pattern now would seem unlikely.

It is extremely difficult not to be negative about the outlook for US real estate and the homebuilders and those regional banks which are most exposed to the sector and which do not qualify as TBTF (i.e. Too Big to Fail).




BIK  SPDR S and P BRIC 40  

BIK, one of the main sector funds which track the BRIC economies, has one of the least negative looking charts for those who want to play the long side.



Daily Form August 10, 2010


Inter-market Technical Analysis using algorithmic pattern detection


TUESDAY AUGUST 10, 2010       07:03 ET




The 240 minute chart for the S&P 500 futures shows a useful coincidence between the uptrend line drawn and the top of the green cloud formation.

The 1110 level appears likely to be tested in today’s session and a close below that level would energize the bears. I remain relatively neutral with a slight bias to the buy side for US equities at present. Despite the obvious case that the fundamentals are deteriorating, from a technical perspective the ability of this index to remain above the trend line indicated since July 20th and the proximity of the 1130 target would still tend to suggest that it would be prudent to wait for the short sellers to take their best shot and then on an intraday basis look for opportunities to ride back on the squeeze induced rallies.



EUR/JPY is below 113 again and the technical picture since I last discussed this pair a week ago looks weaker.



I have also commented on CHF/JPY and the daily chart is pointing to two key violations of the uptrend since the spring of 2009.

The pending test of the bottom of the cloud will be revealing as a failure for the Swiss franc to arrest its decline against the yen would be a clear signal that in the sliding scale spectrum from risk appetite to risk aversion, the latter is gaining more converts.



Last Friday I mentioned that spot gold would be vulnerable if we see a close below the 1190 level. As it turned out the weak NFP data, with the heightened sense that QE2 may be on the horizon propelled the metal upwards.

However the 240 minute chart is sending another warning signal that a correction might be at hand.

The metal is likely to respond quickly to any signals from the Fed regarding potential changes in future monetary policy, but amidst all of the gyrations in price, I would repeat that the 1185/90 is now a key support level.