Last Thursday’s abrupt intraday reversal highlighted potential problems ahead for the market, especially the large Nasdaq stocks, and it will keep me cautious this week. Although price action on Friday was constructive and many barometer stocks regained much of the losses sustained in Thursday’s late sell-off, volume remained quite significantly below that on Thursday, and there are growing negative divergences on some of the key charts that I monitor.

The S&P 500 along with many other individual stocks and indices registered an inside day, and on the SPY proxy the volume at 123 millions shares was merely one half of that seen in the previous session. Earnings statements will be in the fore this week and this is a time to expect price behavior for which recent chart action is not always a reliable guide.



The downtrend through the highs remains intact for the banking index (^BKX) and, despite the boost given to equities in general by the FOMC easing, the persistence of problems in the credit markets is bringing about a reticence by fund managers to take on their customary exposure to the sector.

A rescue scheme for the off balance sheet structured investment vehicles (SIV’s), another innovation in the brave new world of financial engineering which has been master-minded by Treasury Secretary Paulson, is even larger, at $75bn, than the rescue mounted for LTCM in 1998. If this enables the vast backlog of asset-backed paper that is clogging up the financial system to clear, then perhaps this will tempt some of the sceptics back into the banking sector.



I will be monitoring the homebuilders sector this week (XHB) as there are some positive technical characteristics, but I would only contemplate long positions in any of the individual builders or the sector fund if XHB can break above the 50-day EMA level around $24.50.



TRADE OPPORTUNITIES/SETUPS FOR MONDAY OCTOBER 15, 2007

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.

The chart for FuelCell Energy (FCEL) reveals a shooting star formation on heavy volume from last Thursday and furthermore this is in the larger context of a pullback from steep losses sustained at the end of September.



Baidu (BIDU) could be a major winner on the short side when the Asian markets begin their correction, but trading this stock is not for the faint hearted.



Imclone Systems (IMCL) faces a real hurdle at $46 which marks the level from which the stock plunged in early September.



The volume and money flow characteristics are supportive of a bear flag interpretation on the chart for Las Vegas Sands (LVS).



Travelzoo (TZOO) has a rather striking bull flag formation and the target for another move ahead would be towards the 200-day EMA and chart resistance close to $26.



Protein Design Labs (PDLI) has pulled back to the 200-day EMA after the strong gap up on October 2.



Synaptics (SYNA) seems to be defying gravity at current levels and the negative divergences are quite remarkable.



J.B. Hunt Transport Services (JBHT) moved above all three moving averages at the end of last week on very substantial volume that was untypical for the session as a whole.



Clive Corcoran is the publisher of TradeWithForm.com, which provides daily analysis and commentary on the US stock market. He specializes in market neutral investing and and is currently working on a book about the benefits of trading with long/short strategies, which is scheduled for publication later this year.

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