Daily Form May 10, 2010

Inter-market Technical Analysis using algorithmic pattern detection

MONDAY MAY 10, 2010       05:49 ET

As news of the EU bailout package surfaced in the trading hours in Asia there was a noticeable jump in the euro, and as traders in Europe started covering short positions or instigating new long positions around 7 am European time (as I did) the ascent of $EURUSD proceeded through 200 pips almost without interruption - a very nice way to start the week.

Also those who showed sufficient foresight (and courage) to buy the S&P futures before the weekend on the prospect that the policy makers in Brussels would be scared into a massive show of force to present EMU disintegration, would have been rewarded with a decent 30 point jump or so as of current writing.

On CNBC’s European Closing Bell on Friday afternoon I expressed the opinion that the e-mini contract would explore the boundaries of the cloud formation in the short term and that is exactly what has happened in trading so far today - with a possibility that when the US opens there may be even more positive response to the EU rescue package.

The bi-polar market scenarios, discussed here recently, will continue and it presents nimble traders with potentially very profitable opportunities. Once you have gauged whether it is going to be a RISK ON or RISK OFF session there are several instruments that immediately should be on your list for that day’s trading. Whether you want to carry any of those positions overnight is a harder decision to make.

Listed below are some RISK ON trades worthy of consideration for today’s session.

The euro rescue plan is a complex package and may not be as robust as it appears. Nevertheless the momentum for the EZ currency in the near term is now clearly upwards rather than downwards.
The short term target for today on the upside is $1.3120 and opportunities to buy at $1.29 or thereabouts should be taken.
Longer term I still see potential hazards - political as well as economic - to the EMU and will stand by my longer term view, expressed here Friday, that we could see $1.18 later this year.

$AUDJPY is mirroring the recovery in the S&P futures- which is another of the themes which I touched on in my guest slot on CNBC on Friday. But trying to explain the essence of the FX carry trade in the few minutes allotted to each chart is challenging to put it politely.
Short yen in most currency crosses should be quite profitable for a day or so.

When RISK ON prevails gold will retreat and it has done so in overnight trading. So far the base of the cloud on the chart has held and for longer term investors - sudden drops in the metal are still worth buying in my estimation.


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

TBT  Ultra Short Lehman 20 Plus ProShares  

Expect a large opening gap up on TBT but there is a plausible case that this fund which moves in tandem with increased yields on long term US Treasuries could return to the cloud formations rather quickly.

HYG  iShares High Yield Corporate Bond  

The chart for HYG, which provides exposure to the high yield sector, shows that the sector was a major casualty last week and once again there will be plenty diving back into this area of the bond markets and a sizable rally could be seen today - again expect a large opening gap upwards.

YCS  UltraShort Yen ProShares  

YCS is a useful ETF for aggressive traders who want to play the short side of the Japanese yen.
A case could be made for targeting the recent highs in coming sessions.

IPF  SPDR S and P International Financial Sector  

The final suggestion for today would be a long position in IPF which is an exchange traded fund which tracks the international financial sector.
With some European banks up 15% and more after the bailout announcement, this fund is bound to have a massive opening gap, but the top of the cloud could be attainable in coming sessions so it is very much a case of deciding on the risk/reward ratio after looking at available entry points when the ETF opens for trading today.