Yesterday’s downbeat session produced two key breakdowns on the sector charts that I like to monitor. Firstly the banking index (^BKX) dropped below the intersection of the 20- and 50-day EMA’s and closed with a 1.7% loss. Citigroup’s earnings contributed to the fall but more worryingly the new bailout fund, the inauspiciously named Master Liquidity Enhancement Conduit or M-LEC, received a lukewarm reaction from many traders.

The fact that the Treasury has warmly welcomed this initiative is double-edged as it suggests that there may have been no alternative but to encourage three of the largest US banks - that are too big to fail - to underwite the troubled asset-backed paper market. If this market begins to come further unstuck for any reason there could be quite a lot more to worry about than the woes of sub-prime lenders.



The second break occured in the S&P Retail index (^RLX) which also dropped below the same moving averages as the banking sector.



In overnight trading the Hang Seng Index (^HSI) reversed again to close with a 2% loss after almost penetrating the 30,000 level intraday. This index has traced out a fifty percent trajectory from the mid-August lows to today’s intraday high and, as the chart reveals, the index looks to be quite precariously balanced.

The recent action in Bombay and Hong Kong has echoes of the price action of the Nikkei in the late 1980’s but, as was true then, trying to pick the top in these moments of extraordinary euphoria can be quite hazardous to your wealth.



TRADE OPPORTUNITIES/SETUPS FOR TUESDAY OCTOBER 16, 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.

Lowe’s Companies (LOW) broke down yesterday from an unorthodox bear flag pullback pattern that I mentioned recently and it is probable that there is further downside to be explored as the stock may not find real support until the mid-August low near $26 is tested.



Lamar (LAMR) could be poised to break out of a bull flag formation.



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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