The Nasdaq Composite (^IXIC) along with the other broad equity indices sold off in the early going yesterday and touched 2698 as its intraday low. In finding support at this level, and concluding the session with a 1.1% gain, the upward breakout above the July highs that was achieved on October 1 is still intact. The suspicion is, however, that a more robust testing of this level will be attempted in coming sessions.



The Treasury market has surrendered all of the gains in yields that pushed the ten-year note to the top end of its range in June. Back then it appeared that a very long-term trendline dating back almost seventeen years was about to be violated as yields pushed towards 5.25%.

Yields, across the maturity spectrum, have now retreated and the ten-year note, as the weekly chart below reveals, is now tagging the 4.4% level which marks the bottom of a range that has persisted for more than two years. The growing concerns about an economic downturn suggest that the odds are increasing that this lower boundary may not hold.



The energy sector fund, XLE, reveals the kind of momentum divergences that often precede a tradable correction.



TRADE OPPORTUNITIES/SETUPS FOR TUESDAY OCTOBER 23, 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 homebuilding sector, as represented by the exchange traded sector fund XHB, mounted a strong counter-trend rally yesterday with several of the constituent stocks up by more than five percent. The sector may rally up towards the 50-day EMA in the near term, but it is doubtful whether, given the continuing gloom and doom about the sector, it is ready for a sustained basing pattern yet.



The risk/reward ratio on a counter trend bounce taking Pulte Homes (PHM) up towards the 50-day EMA would seem to be favorable.



Another bounce candidate that I would not be looking to make a long term commitment to is Wells Fargo (WFC) which could see a return to the 200-day EMA in the near future.
 


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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