Daily Form November 11, 2010

Inter-market Technical Analysis using algorithmic pattern detection

THURSDAY NOVEMBER 11, 2010       11:51:00 GMT

The Treasury struggled yesterday with its auction of 30 year bonds as yield curve players know that this is the part of the maturity spectrum where the Fed is least likely to provide a safety cushion.

The yield closed at 4.24% (as anticipated here last week), but the long upper shadow to the candlestick suggests that some short covering of futures positions was being implemented by prop trading desks in anticipation of a negative auction result.

The recommendation is to continue shorting the long end of the UST spectrum, adding to short positions in either futures or ETF’s such as EDV (see below) on any counter-trend rallies.

In European trading on Thursday morning the market is yet again showing a remarkable degree of complacency regarding the public debt crisis in the EZ periphery.
Here are a couple of rather striking observations from a Bloomberg report on the Irish "problem", and there are similar issues brewing from Greece, Portugal and to some extent Spain as well.

The cost of insuring the bonds of Irish banks soared to distressed levels amid concern that the government won’t be able to afford the cost of bailing out the nation’s banks.

Irish and international banks’ loan losses in the country may total least 85 billion euros ($117 billion), central bank Governor Patrick Honohan said in Dublin yesterday, Morgan Kelly, an economics professor dubbed “Doctor Doom,” said on Nov. 8 that mortgage defaults may push the cost of Ireland’s bank bailout to 70 billion euros, more than the government’s estimate of 50 billion euros.

Credit-default swaps on subordinated debt of Allied Irish Banks Plc, the nation’s second-largest lender, are 57 percent upfront and 5 percent a year, meaning it costs 5.70 million euros in advance and 500,000 euros annually to insure 10 million euros of the bank’s debt for five years. Swaps tied to the subordinated debt of Bank of Ireland, the country’s biggest bank, cost 31.5 percent upfront and 5 percent a year.

“Concern seems to be mainly targeted at Ireland and its banks and everything looks like it’s going against them at the moment,” said Simon Adamson, a bank credit analyst at CreditSights Inc. in London. “Whatever they say to reassure people, it doesn’t seem to be having any effect.”

The S&P 500 futures are sitting roughly at the mid point of the triangular channel that "fits" trading in the 60 minute framework and a test of the 1200 level might be required before further progress back to the top of the channel is feasible.

The long IEF/short EDV trade continues to generate attractive returns but taking some profit from the position and adding to the short EDV side on any rallies would be the recommended approach.

On the 60 minute chart AUD/JPY is showing price rejection around the 82.80 level and a succession of marginally lower highs. A retreat to 81.80 is feasible in the next few hours.


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


EUR/CHF delivered on the target just below 1.33 and still looks attractive on the short side on rallies back towards 1.3365.


EUR/GBP has been a profitable trade so far this week and despite scaling out of much of the position I have left some on the short side towards the lower horizontal dotted line on the 240 minute chart below.


Re-entry points on the short side for GBP/CAD around the arrow on the 240 minute will be on my watch list for today's session.

OMX  OfficeMax Incorporated  

OMX is a long recommendation based on positive dissonance characteristics which have been flagged in the premium chart analysis section of the Tradewithform. com website. The recent high level indicated by the arrow becomes a feasible target with setting a suitable stop loss level (from the entry point) reflecting at a minimum a 2:1 reward/risk ratio.

PCY  PowerShares Emerging Mkts Sovereign Debt  

PCY, the exchange traded fund which tracks the sovereign debt from emerging markets, has been indicating negative divergences for some time and I have lost money on the short side but I still expect this ETF to eventually succumb to a substantial correction.

FLEX  Flextronics International Ltd. (ADR)  

One other chart which instantiates the same pattern template as that for OMX is for Flextronics and a re-visit to the April high is also a feasible target.