The inevitable correction came yesterday, but with many stocks and sector funds showing large downward opening gaps it was not an easy day for setting up profitable short positions. As anticipated in yesterday's commentary, the semiconductor fund SMH looked like an obvious false breakout from Tuesday's trading, but to have profited from the six percent drop one would have had to have taken up a position on Tuesday's close and not on yesterday's open.

The S&P 500 came down sharply towards the 20-day EMA located at 895 and one would expect that level to be tested again today. At this time it would be imprudent to stick one's neck out too far, but my intuition is that if we are still above the ascending trendline indicated on the chart after Friday's close on the S&P 500 we should still be targeting 1040 in the next few weeks. If we crack decisively below that ascending line there could be a lot of recently converted optimists who will suddenly start seeing half empty glasses again.

I would like to conclude this section with the following citation from a document that has just been published by two luminaries from the world of financial engineering - Paul Wilmott and Emanuel Derman

MODELERS OF ALL MARKETS, UNITE! You have nothing to lose but your illusions.

The Modelers' Hippocratic Oath

~ I will remember that I didn't make the world, and it doesn't satisfy my equations.

~ Though I will use models boldly to estimate value, I will not be overly impressed by mathematics.

~ I will never sacrifice reality for elegance without explaining why I have done so.

~ Nor will I give the people who use my model false comfort about its accuracy. Instead, I will make explicit its assumptions and oversights.

~ I understand that my work may have enormous effects on society and the economy, many of them beyond my comprehension.

It is the last part of the Oath that reminds one of that old expression about stable doors and horses bolting.



As anticipated in Monday's commentary the VIX did not slice through the 200-day EMA without a sharp reversal, and yesterday we jumped by more than 12% back to the 43 level and with the anticipated gyrations of the next 48 hours, it is quite conceivable that we could see a move back towards the 50 level.



There is an interesting convergence of the 20- and 50-day EMA's on the UK's FTSE index around 4370 and this should provide a tradable support level in the short term. The Bank of England is expected to reduce its short term rate by at least 50 basis points today, which would be the lowest it has ever been in its more than 300-year history. Yet another reminder that we live in historic times.



Asian markets reacted poorly in Thursday's trading to the weakness in the US and warnings from Intel, Time Warner etc. The Hang Seng (^HSI) has had back to back drops of about 4% and as the chart reveals a case could be made that the late December/early January action was a classic false breakout. However, with unusual volatility to be expected over the next two trading sessions, I am still keeping a flexible view on the near term prospects for this index.



Pan American Silver (PAAS) would be appealing on the long side as it comes down towards the converging moving averages.



Hansen Natural (HANS) has retreated to a previous resistance level that may now provide some support for a short term bounce.



Owens Illinois (OI) fits the requirements for one of the more reliable patterns that favors the long side.



Allstate (ALL) is approaching an area of potential support at the intersection of two key moving averages.



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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