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.


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.