Daily Form January 31, 2011


Inter-market Technical Analysis using algorithmic pattern detection


MONDAY JANUARY 31, 2011       10:35:00 GMT




Friday’s trading in the US was very much held captive by the events unfolding on the streets of Cairo and other Egyptian cities. Many traders would have been monitoring events via the live feeds from Al Jazeera and other news services and it is hard not to assume that some momentous changes lie ahead for not only the largest state in the region (90 million people) but also a major cultural influence on the Arab world.

Security concerns and the uncertainty about the eventual outcome of the uprisings now being seen in other states in the region are likely to produce some emotional trading activity in the weeks ahead. Generally speaking the lack of any clarity regarding the repercussions will tend to keep the animal spirits in check and there will be more investors/traders erring on the side of risk off rather than risk on .

While certain overseas markets have shown sharp moves in trading on Monday there has perhaps not been the larger disruptions that many were expecting. But this could be the quiet before the storm.

The 240 minute chart for the S&P 500 e-Mini Futures (March contract) show that the drop below the trend line illustrated, and down towards the 1260 level, must now raise the possibility that lower levels will need to be revisited to test the conviction of the equity bulls. My suggestion is that while the index remains below the 1280 level I would be tempted to fade sudden rallies but be prepared to take profits or losses quickly.



A week ago I commented on crude oil and suggested that the base of the cloud formation on the daily chart should provide support and that, absent a drop below $85, I would suggest a long position with a target of $90.60. So far in today’s trading we hit $90.82 enabling me to exit the position with an attractive return.

One would expect this market to remain volatile in coming days and only intraday opportunistic trades with a bias towards buying any serious setbacks would be the recommended approach to trading this commodity at present.



The 240 minute chart for AUD/JPY shows the validity of using cloud formations as pivotal levels for anticipating support/resistance. The strength in the yen following the developments in Egypt has put the cross rate back in the spotlight from my perspective, and, while the base of the cloud provided support, my longer term view is that 80.60 will need to be tested soon.
The outcome of that testing will, as previously stated here, provide valuable clues as to the overall risk appetite for the emerging markets and equities from a macro perspective.



EUR/CHF has performed very much in line with expectations expressed here recently. The flight to safety dynamics will keep a firm bid under the Swiss Franc and I would be targeting the level indicated by the arrow on the chart in the intermediate term.






TRADE OPPORTUNITIES/SETUPS FOR MONDAY JANUARY 31, 2011


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





INP  iPath MSCI India Index  

Also featured here last Thursday was the comment regarding Indian equities.


INP, which tracks the MSCI India index, has been featured in these columns recently and the drop below the 200 day EMA on the sector fund has now been reinforced by today's close on the Mumbai exchange as discussed above.

In general I suspect that there may well be some serious re-thinking taking place amongst major asset allocators regarding the risk/reward ratios for many EM markets given their out-performance during 2010 and the realization that adventurous investing is not necessarily the preferred course when geo-political factors are undermining confidence in the ability to preserve capital and hedge exposure in newer markets.




MES  Market Vectors Gulf States ETF  

MES,an ETF providing exposure to the Gulf States region, is likely to trade erratically in coming sessions but such trading could produce sharp rallies as well as plunges.




IDX  Market Vectors Indonesia ETF  

The following comments from last week on IDX have been validated by recent events and I would expect this fund to remain under considerable pressure in coming weeks


IDX, which tracks Indonesian equities, is behaving erratically and in my estimation draws attention to the more anxious tone which overshadows the confidence of the more adventurous asset allocators in emerging markets.





EEM  iShares MSCI Emerging Markets Index  

EEM has broken an uptrend line and a feasible target in coming sessions would be a test of the 200 day EMA.




EWZ  iShares MSCI Brazil Index  

Late last year I wrote this comment regarding the exchange traded fund EWZ


The chart for EWZ, which tracks the MSCI Brazil Index, may also be headed for a testing of the 200 day EMA.

Having touched the green line (i.e. the 200 day EMA) in Friday's session this index would now be a candidate on my buy list of geographical ETF's as I suspect that it will be, relatively speaking, less susceptible to fall out from the current developments in the Middle East.



Daily Form January 27, 2011


Inter-market Technical Analysis using algorithmic pattern detection


THURSDAY JANUARY 27, 2011       10:26:00 GMT




Standard & Poors has reduced its sovereign credit rating on Japan from AA to AA- and there was an immediate upward spike in USD/JPY to 83.25 as evidenced on the 240 minute chart below.
As indicated the spike violated a key down trend line and the suspicion is strong that this will need to be retested soon. In coming hours I shall be getting long USD/JPY on any significant pullbacks.

Longer term the question for global investors who are heavily committed to the yen and to JGB’s, which includes especially the Chinese central bank, must be just how likely is it that this credit rating will continue to erode and lead to funding problems for the Japanese government? It is worth restating that Japan has, by far, the highest debt/GDP ratio of any of the "richest" nations.



The Mumbai exchange sold off going into the close and has now registered a new multi-period intraday low and, quite significantly, has closed below the 200 day EMA level.



As part of more subdued animal spirits with respect to the BRIC economies the Bovespa index in Brazil seems likely to retest its 200 day EMA in coming sessions.



The 240 minute chart for GBP/USD is revealing the fragile nature of the rebound/squeeze on a lot of short selling which arose earlier this week after the UK government released its troubling Q1, 2010 GDP initial estimate of negative 0.5%.

I maintain the view expressed here recently that an intermediate term target of $1.5650 is quite probable, and my hunch is that once the trend line illustrated is broken there could be an avalanche of selling. But patience is a virtue when trading sterling, so the advice is not to become too zealous until there are unmistakable rumblings of an impending avalanche.






TRADE OPPORTUNITIES/SETUPS FOR THURSDAY JANUARY 27, 2011


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





INP  iPath MSCI India Index  

INP, which tracks the MSCI India index, has been featured in these columns recently and the drop below the 200 day EMA on the sector fund has now been reinforced by today's close on the Mumbai exchange as discussed above.




IDX  Market Vectors Indonesia ETF  

IDX, which tracks Indonesian equities, is behaving erratically and in my estimation draws attention to the more anxious tone which is overshadowing the confidence level of the more adventurous asset allocators in emerging markets.



Daily Form January 25, 2011


Inter-market Technical Analysis using algorithmic pattern detection


TUESDAY JANUARY 25, 2011       12:14:00 GMT




GBP/USD was whacked hard this morning after the UK government released the GDP statistics for Q4,2010 which came in at a rather alarming -0.5%. The cheerleaders were quick to point out that December was unseasonably cold so, presumably the suggestion would be that the statisticians would need to doubly seasonally adjust the numbers... I wonder if they do that in Germany and Canada (which as we all know gets really cold in the winter!) too.

Yet another disconcerting number was included in the report but does not lend itself so readily to seasonal adjustment... the UK debt, if the bailout to the banking system is included (the UK taxpayer still have sizable interests in RBC, and Lloyds) now sits at 155% of GDP. The ratings agencies will surely be persuaded towards a benign view of such numbers since, the view will be taken that RBC is merely undergoing a period of "convalescence" courtesy of the UK taxpayers and will eventually re-emerge as a robust bank...we can but hope.

Anyway the daily chart below - which includes this morning’s sell-off - suggests intermediate term targets of $1.5720 and eventually $1.5650.



Spot silver is now poised at the bottom of the daily cloud formation and touched the $26.50 level in trading during the last few hours. The intermediate term target is illustrated on the chart.



AUD/USD is providing some good scalping opportunities at present and as can be seen from the hourly chart below the extended bout of range trading is moving the price further into the apex of a distinct triangular formation.

My current bias is towards expecting a breakout to the downside with a target of around .9870 but I am prepared to adjust that bias if the top of the downward sloping trend-line is decisively violated. In the interim fading/reversing at the top or bottom of the range has worked well during the last 24 hours.



The Shanghai exchange closed down again in trading on Tuesday and reached a new multi-period intraday low. However the dotted line shows that the current price zone has been an area of previous support and the expectation is that we could see another pullback higher before the waterfall pattern resumes.


Daily Form January 24, 2011


Inter-market Technical Analysis using algorithmic pattern detection


MONDAY JANUARY 24, 2011       11:54:00 GMT




As commented last week the best sectors to be short when markets correct are those with high beta and this is certainly a characteristic of the Russell 2000. So far the correction has been mild, and I am still not advocating any aggressive short positions in US equities on the simple premise that it is not prudent to go against the grain as far as ongoing POMO operations from the Fed are concerned.

I have voiced concerns in this column and elsewhere recently that the "supportive" actions of government programs has a way of removing the clarity of price discovery in market dynamics and to that extent also raises some issues for technical analysts.

Reviewing the chart below one could easily make the case (in more "normal market conditions") that the current corrective mode could easily see the index retreat towards the 740 level, as indicated by the arrow on the chart, as this marked the top in April as resistance and now needs to be tested for potential support. But there have clearly been large rewards for funds and prop trading desks to "get ahead" of the Fed and reap easy rewards as a consequence of the almost daily purchases of Treasuries providing an underpinning of macro liquidity which allows equities to keep rising. Under such a scenario I have been less active in taking positions with regard to US equity indices so far this year, and prefer to focus more on ETF’s from different geographical sectors as well as opportunities in FX and commodities.



The daily chart which captures the yield on the longest maturity UST reveals a handle like formation which appears to be ready to test the 4.6% level. Although the cup/handle pattern has proven to be a reliable indicator and precursor for breakout patterns in individual equities and ETF’s, it should be used with more caution with regard to yield levels.
Longer term the outlook for UST’s seems, on balance, to be one where lower prices and higher yields lie ahead and this would seem to especially true at the furthest end of the yield curve i.e. the 30 year bond.



The chart below shows the current price level at the time of writing (during trading in Europe on Monday morning Jan 24th) on the March contract for WTI.
After almost touching $93 on March 19th crude has retreated back towards a potentially strong support level as indicated by the intersection of the two trend lines drawn on the chart as well as the daily cloud formation.
I would expect to see buying support come in around the $87.20 level and a target price of $90.60 or thereabouts is supported by the Ichimoku cloud projection which indicates a likelihood of moves back towards this level in coming sessions.

The one qualification that I would insert to this near term forecast would be a failure to find support at the $87 level and I would then be prepared to stalk for a short position on a break below $85 with a feasible target of $82.30 which coincides more or less with the 200 day EMA.



The euro has staged a rather remarkable recovery over the last two weeks and clearly the single currency has keen buying support (most likely from the PBOC among others) at the bottom of the recent range around $1.29.
While there could still be room for further upside for EUR/USD (but not much as I expect that $1.37 will be a difficult hurdle to cross), I am favoring a short EUR/CHF position.
The cloud formation on the daily chart suggests a relatively attractive reward/risk ratio with a feasible 200 pip gain and with less than a 100 pip risk from the levels depicted on the chart below.






TRADE OPPORTUNITIES/SETUPS FOR MONDAY JANUARY 24, 2011


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





THD  iShares MSCI Thailand Invest Mkt Index  

THD, which tracks the MSCI index for Thailand, dropped below a key chart level in Friday's session and coupled with the clear break down from the cloud formation, suggests that lower prices lie ahead...with a feasible target at the 200 day EMA level.
In Asian trading on Monday the Dow Jones Thailand Index fell by 1.7% so care should be taken to find an appropriate entry level on any rebound rallies in coming sessions.




JXI  iShares S and P Global Utilities  

JXI, a sector fund for global utilities, displays a gravestone doji pattern from Friday's trading and could have registered a double top at the $47 level.




EPU  iShares MSCI All Peru Capped Index  

EPU is an exchange traded fund which provides access to Peruvian equities and, in turn, in similar fashion to the fund ECH, which tracks the Chilean stock market, is also a good surrogate for exposure to basic materials and industrial metals, especially copper.
The technical condition of the chart below also would suggest that the 200 day EMA level at approximately $42 could be a target for nimble short sellers or an entry point for those looking to benefit from a probable rally when this level is attained.




XLB  SPDR Materials Select Sector  

XLB, an ETF for the industrial materials sector, has a chart resistance/support line as well as Ichimoku cloud support at the level indicated by the arrow on the chart/



Daily Form January 21, 2011


Inter-market Technical Analysis using algorithmic pattern detection


FRIDAY JANUARY 21, 2011       12:18:00 GMT




Spot silver reached an intraday high of $31.22 on January 3rd and has subsequently dropped by more than ten percent. As discussed on January 12th, which can be found here, it is now feasible to contemplate that traders will want to target tests at both the base of the cloud formation at $26.50, and also the lower dotted line close to $25.



Here again are comments from the January 5th newsletter

EWA, an exchange traded fund which tracks the MSCI Australian index, has a formation which might reveal itself in coming sessions as an intermediate term double top. It is also worth pointing out that EWA is very highly correlated with AUD/JPY and AUD/USD.





IWM gapped down in yesterday’s session and the volume is picking up on this corrective action.



AUD/USD is at a critical level where a break below the very thin cloud formation (which indicates that there is little support offered by this pattern) would also violate the upward trend line drawn.
Although I am not yet ready to pull the trigger weakness in today’s session could present an intermediate term trading stance on the short side with a target of 0.95 - also coincidental with the 200 day EMA.






TRADE OPPORTUNITIES/SETUPS FOR FRIDAY JANUARY 21, 2011


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





IYT  iShares Dow Jones Transportation Average  

IYT, an ETF which tracks the DJ Transportation sector, has sold off for two sessions on increased volume but has chart support at the level indicated by the dotted line.




IDX  Market Vectors Indonesia ETF  

Further to yesterday's comments on IDX, which tracks Indonesian equities, the weak technical pattern has now registered a decisive break below the 200 day EMA.



Daily Form January 20, 2011


Inter-market Technical Analysis using algorithmic pattern detection


THURSDAY JANUARY 20, 2011       12:18:00 GMT




The hourly chart below for the S&P 500 futures shows that the 1275 level is being quite robustly tested during European trading.
Also notable is the break of the dotted trend line and the fall below the cloud formation during yesterday’s trading. As previously suggested earlier this week the sell off in China, India and to a gathering extent in Brazil, could be the precursor to a more risk averse environment in coming weeks. I shall repeat my overall perspective on US equities - while the longer term outlook suggests that a move towards the high 1300’s is certainly feasible this year, the easy money since the March 09 recovery is behind us and there is rather too much complacency factored into current prices.



Spot gold has now penetrated cloud support on the daily chart and could be ready for a corrective phase which could potentially see a retreat to the mid $1270 area. Even if it retreats to the 200 day EMA level on the chart the longer term uptrend line would not have been violated, with an underlying bull market prognostication still valid



The Shanghai Composite Index sold off again in Asian trading - pulling back almost 3% which reversed the gains made in Wednesday’s session. Also notable, as commented earlier this week, is the manner in which the 50 day EMA has turned sharply down with the potential for a "death cross" of the 200 day EMA.



I shall be a guest on CNBC’s European Closing Bell this afternoon and, time permitting, will discuss the chart below for AUD/JPY. As regular readers will know I find this particular cross rate fascinating and somewhat predictive of risk appetite in general.
I have marked a couple of trend lines which, I believe, are significant. The first which tracks the rising lows from mid August of last year has now been broken while the longer term line is still clearly intact.
The 80.60 level is quite critical for this cross rate and a break below that would not only drop us below the cloud formation but also the 200 day EMA, setting up a potential for a test of the longer duration uptrend line around 76.50.
If the BRIC and EM markets were to continue their sell off I would expect this lower level to be tested but I would also expect there to be a serious effort to mount a rally at the 200 day EMA level around 80.70 beforehand.






TRADE OPPORTUNITIES/SETUPS FOR THURSDAY JANUARY 20, 2011


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





BIK  SPDR S and P BRIC 40  

BIK, one of the sector funds which track the BRIC economies, could be in the process of registering a double top formation. If there is an exodus under way from these high momentum economies then this fund is one way to position oneself for an intermediate term correction, even though longer term the long side is still the preferred stance.




XRT  SPDR Retail ETF  

XRT, an ETF for the retail sector, shows some technical weakness following yesterday's action. The close is below the 50 day EMA and has now entered the cloud formation after a rather extraordinarily bullish run since the beginning of last September, which echoes that seen on most US equity ETF's.




IWM  iShares Tr Russell 2000 Indx  

IWM is the exchange traded proxy for the Russell 2000 and was one of the worst performers in yesterday's equity sell off. As I have indicated here previously this index has a relatively high beta and while it will outperform the broader S&P on the way up, conversely it will under-perform on the way down as well.




IDX  Market Vectors Indonesia ETF  

The attrition which is taking place in several key EM markets is also revealed in the exchange traded fund which tracks Indonesian equities. Here are comments from a month ago and coincidentally my last newsletter of 2010 (dated December 21st) which still seem apt.


IDX, which tracks Indonesian equities, after registering a series of lower highs may be headed for a test of the base of the cloud formation and even further towards the 200 day EMA which also coincides with a support level on the daily chart.




Daily Form January 18, 2011


Inter-market Technical Analysis using algorithmic pattern detection


TUESDAY JANUARY 18, 2011       10:50:00 GMT




GBP/USD has broken out on its intraday charts and as the long term weekly chart below suggests there is now a feasible intermediate term target of a potential re-test of the high just below $1.63 seen on November 5th last year.
Reviewing the fibonacci grid on the chart it is notable that sterling has been below the 38% retracement level of the larger scale high/low range seen on this chart since dropping below the weekly pink cloud formation at the beginning of 2010. The actual 38% target would be around $1.6380, and also visible on the chart is the 200 week EMA target at $.166 which I suspect may be a bridge too far in the foreseeable future.
Concerns about the accelerating rates of growth in the RPI and more specifically the CPI are encouraging traders to think that the BOE may be contemplating a rate hike. However the housing market remains fragile and any forthcoming weak economic data could easily dampen the anticipation of a tougher monetary policy. For the time being one could go with the flow on the long side, but sterling will be living dangerously now that it is back above the pivotal $1.60 level.

For any readers who are based in the UK, or visiting London this week, I shall be making a presentation to the CFA Institute at Canary Wharf tonight. The subject matter will focus on inter-market quantitative analytical tools, including the correlation studies which have been featured here recently. Further details, if you are interested in attending, can be found here .



The Mumbai Sensex Index (BSESN) found support at the 200 day EMA as discussed here recently.
It is significant that Goldman Sachs is becoming more cautious on the BRIC economies and is (rightly) focusing on the fall-out in many areas of the overall Emerging Markets (EM) sector as a result of rising inflation.



The Shanghai Composite Index stalled in Asian trading on Tuesday morning, but as the chart below reveals a key uptrend line (similar to that seen for the Mumbai Index shown above) has been broken and the Chinese market may be in the vanguard of a BRIC retreat.
As mentioned here yesterday there are numerous ETF’s which provide access to the BRIC’s and other EM sector exposure, but one has to differentiate between those which may fall out of favor (temporarily), and those which are still relatively attractive and have not yet been huge beneficiaries of the zealous pursuit of BRIC inspired momentum strategies.



The following 3D chart illustrating the trajectories of the benchmark (10 year) government bonds of German, Spain and Portugal over the last year is one of the graphics which I shall be featuring on Cantos TV later today - and which can be viewed online at their site and also at Reuters Insider.

All rates have continued to move upwards - although there is some suggestion of a leveling out at current levels. Not immediately apparent, because of its lower absolute magnitude in percentage terms, is the continuing uptick in the yield on the German bund which is currently trading above 3.07% and at its highest level since April 2010.

This does not appear to be dampening enthusiasm for the DAX however which continues its relentless journey higher and is currently up one percent in European trading at around 7150. While I am not shy about pointing to good calls that this commentary makes from time to time I have to admit to being wrong several times on mis-reading this index and sensing that a correction was imminent.

The highest close on the DAX was seen on July 13, 2007 at 8092 and given the current level of bullishness one has to take seriously the possibility that a move back to the historic high could be a target during the course of the next few months - even weeks!


Daily Form January 17, 2011


Inter-market Technical Analysis using algorithmic pattern detection


MONDAY JANUARY 17, 2011       11:57:00 GMT




The Shanghai Composite Index dropped by more than 3% in Asian trading on Monday and as can be seen from the Ichimoku based chart below the close has now broken below the cloud formation and also below an uptrend line through recent lows (not drawn).
While mature economies seem quite relaxed about inflation - indeed Chairman Bernanke has stated that one of the aims of QE2 is to promote "moderate" inflation - the Asian nations are now tightening with a degree of seriousness that prudent monetary policy should dictate. Once out of the toothpaste tube the inflation genie is hard to get back in (please excuse the mixed metaphors).

For any readers who are based in the UK, or visiting London this week, I shall be making a presentation to the CFA Institute at Canary Wharf on Tuesday, January 18th. The subject matter will be my increasing focus on inter-market quantitative analytical tools, including the correlation studies which have been featured here recently. Further details, if you are interested in attending, can be found here .



AUD/JPY has broken below a key trend line on the daily chart.



EURUSD has met resistance exactly at the base of the green cloud on the daily chart and, as suggested here on Friday, if the $1.3275 level does not provide support when tested then a return to the $1.3150 becomes the next obvious target for day traders.



As part of the presentation that I shall be making tomorrow to the CFA Institute in London the following chart seemed wothwhile to include in today’s commentary as it continues with the recently introduced theme of demonstrating strong correlations between ETF’s and FX pairs.
The chart below shows the normalized trajectories taken by PXR, an exchange traded fund which tracks Emerging Markets Infrastructure assets, and the AUDUSD exchange rate.
Using a process of rolling linear regressions over the past two years the R squared value for this relationship is approximately 0.63 and this high correlation is also quite stable when one uses a rolling correlation analysis (this will be explained on another occasion).
In general there has been, over the past two weeks, a rather notable decline in the correlations between many ETF’s and FX pairs which might suggest that the equity market is beginning to develop more institutional support and is less reliant on algorithmic trading for liquidity. There are other possible explanations as well but these will also have to wait for another occasion.






TRADE OPPORTUNITIES/SETUPS FOR MONDAY JANUARY 17, 2011


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





MUB  iShares S&P National AMT-Free Muni Bonds  

With regard to the dramatic drops in the muni bond market here again is Friday's comment regarding MUB


Once again the downward staircase pattern embedded within a descending wedge is a reliably bearish signal.





CMF  iShares S and P California Municipal Bond  

CMF also has continued its plunge, although the doji star formation can sometimes be seen at inflection points and a rebound, even if temporary, would be my best guess as to action in the next few sessions.




INP  iPath MSCI India Index  

INP, which tracks the MSCI India index, dropped below the 200 day EMA and now faces a fairly critical test as to whether buying support can be found. The recommended course would be stand aside until the near term course becomes clearer, but further weakness would suggest that the BRIC funds may become interesting on the short side.