Daily Form November 4, 2010


Inter-market Technical Analysis using algorithmic pattern detection


THURSDAY NOVEMBER 4, 2010       11:30:00 GMT




If there was any doubt before that the primary purpose of QE was to "foster" higher asset prices, then those doubts were removed yesterday when Chairman Bernanke specifically went on record to endorse the "wealth effect" that comes from higher stock prices.

In our Alice Through the Looking Glass financial system two old expressions come to mind:

1. Don’t Fight the Fed - now means don’t fight higher stock prices
2. When Wall Street wants to have a sale it puts up its prices - now the Fed will do that for them by feeding the US Treasury bond Ponzi scheme.

S&P 500 futures are trading around the 1200 level in Europe which as can be seen from the 30 minute chart shown earlier this week represents the 162% extension from the critical high/low range in effect recently of 1193 and 1173. Further fibonacci extension targets of 268% and beyond are left to the reader as an exercise (just joking, well maybe not!).



Risk ON is now in the driver’s seat again - and monitoring just how safe it is to engage with the most adventurous asset classes would be to keep an eye on AUD/JPY which now appears to have penetrated the upside target of 81.80, discussed here several times. Potentially longer term levels around 85 are now in play again, but should the 81.80 be broken decisively to the downside then that would be a sign not to overstay the welcome provided by the Fed’s generosity ( or should that be addiction to Ponzi finance).



What better indicator that the risk on traders are celebrating today than the performance of the Hang Seng Index, which, after appearing to entering a corrective phase at the 62% retracement level last week, has surged ahead in today’s trading.



One of the bigger casualties from yesterday’s QE announcement was the long end of the US Treasury spectrum as the Fed made clear that it will focus its asset purchases in the intermediate term maturities.
The yield broke above 4% and if it can now break above the 200 day EMA, which coincides exactly with yesterday’s closing yield of 4.06%, then the 50 week EMA level at 4.25% level could be the next target.






TRADE OPPORTUNITIES/SETUPS FOR THURSDAY NOVEMBER 4, 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





GBPUSD    

I have highlighted a key bar on the hourly chart for GBP/USD which was the reaction immediately following the FOMC announcement yesterday.

Remarkably the range covered fits exactly into the trend channel shown and the extension reveals that the $1.6350 level would seem feasible now as a resistance barrier with $1.6070 as fairly key support.




FTSE    

The FTSE index has now surpassed its April high in European trading.




FVX    

The yield on the five year US Treasury dropped back towards its multi-year low level as it will be the main beneficiary of the QE program




EDV  Vanguard Extended Dur Trs Idx ETF  

Two exchange traded funds provide vehicles for those wanting to take a position on the out of favor long end of the US Treasury yield curve. EDV represents extended duration US Treasury strips and pullbacks might appeal to those believing that this is where the most pain should be expected and where entry opportunities on the short side are most appealing.




IEF  iShares Lehman 7-10 Year Treasury  

IEF is the other ETF which allows access to prices of UST's in the 7-10 year maturity range. Simply stated a short EDV/long IEF position has the potential to profit from a widening of the 5yr/30yr yield spread.