Watching Henry Paulson being interviewed on US television this weekend I was struck by the enormity of the responsibility that has been put on his shoulders. It is very easy to second guess everything that has been done, and not done, by the financial regulators but in the end it has come down, if we are not being subjected to alarmist hype, to the delicious irony that the former CEO of Goldman Sachs has been asked to rescue the world's financial system. He looks exhausted by the process and I for one sense that far too much discretionary authority is being placed with him personally.

Let's hope that this crisis does not have similar ingredients to the other occasion when we were allegedly threatened by weapons of mass destruction.

One weekly chart that does suggest that the worst may have already been discounted is for the sector fund XHB which represents the homebuilders. The positive divergences suggest that it was not last week that the brutality of US real estate problems were being fully contemplated.



The Nasdaq Composite (IXIC) reveals a spinning top/reversal candlestick from Friday's trading as the index confronted the 50-day EMA. As suggested here recently, the perversity of the current malaise is that the new leadership in the market - to the extent that there is upward progress - will be coming from the financials and homebuilders that have already gone though their own Depression era.



The Russell 2000 (^RUT) illustrates the central issue confronting the markets as they have still to really decide on which way to break away from the trading range/congestion patterns that have been in place since March. The daily swings are getting wilder but this index has to finally penetrate 760 on the upside or 660 on the downside to send out a less guarded and ambiguous message about longer term direction for US equities.



The financial sector fund XLF is on the verge of either validating or casting further doubt on the view that perversely we may have seen the end to the unregulated mayhem that allowed Wall Street boffins to make some people of feel a lot richer than they really were.

Greater government oversight of the markets will now be impossible to avoid but, beneath the surface, asset reflation is now top of the agenda for the US government.



On light volume the consumer discretionary stocks reversed significantly. More on fundamental grounds, but supported by some weak technicals, I would suggest that this is not one of the sectors to be long in the intermediate term.



I would also be looking to underweight the technology sector and one vehicle that presumably is still safe to short is the sector fund XLK.



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.

Disclaimer
The purpose of this article is to offer you the chance to review the trading methodology, risk reduction strategies and portfolio construction techniques described at tradewithform.com. There is no guarantee that the trading strategies advocated will be profitable. Moreover, there is a risk that following these strategies will lead to loss of capital. Past results are no guarantee of future results. Trading stocks and CFD's can yield large rewards, but also has large potential risks. Trading with leverage can be especially risky. You should be fully aware of the risks of trading in the capital markets. You are strongly advised not to trade with capital.