Selling continued yesterday in all of the major indices and the S&P 500 left us with the weakest looking chart as its slipped below its 50 day EMA and closed at 1286. During the recovery path from mid January through February we noted that 1280 was a pivotal level for the index, and as the chart reveals we stopped short of testing that level yesterday and, almost surely, we will see a test in the next few sessions. The indices look a little overstretched to the downside following Friday's reversal and we may see a bounce today but it will be critical for the bulls to see if in coming sessions the 1280 level holds.

One of the notable characteristics that has been emerging from our recent scans is the number of stocks that have fallen below their 200 day EMA's. If there are still bullish dynamics underpinning the overall market we would expect to see recovery patterns arising amongst such stocks soon, but if the weakness persists this could suggest a transitional phase is under way.

The Russell 2000 (^RUT) had another weak session yesterday falling back a further 1.4% to close at 742 which puts it almost 30 points below the high that was achieved in early trading last Friday. As we remarked in our weekend commentary the smaller capitalization segment of the market may be manifesting the early signs of asset re-allocation decisions. Portfolios are being re-evaluated in the light of 5% yields in the Treasury market, a situation which is being further exacerbated by strength in key commodities.

The Nasdaq Composite (^IXIC) lost 1% yesterday and the chart shows how the market stopped just short of testing the 50 day EMA at 2301. As is now quite apparent from the trendlines we have drawn the strong upward channel that characterized the trading activity during most of March has been broken and we will need to monitor closely how the index performs as it attempts to recover from this pattern violation.

The CBOE Volatility index (^VIX) closed at 13 yesterday which was its highest close since early February.

TRADE OPPORTUNITIES/SETUPS FOR WEDNESDAY APRIL 12, 2006

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.

XLF, the ETF for the financial sector is exhibiting a similar condition to the one that we noted in relation to the Nasdaq Composite except that in this instance the trendline that has been recently violated extends back further to early February.

Also apparent from yesterday's trading is the close below the 50 day EMA. How well this sector performs during a bounce, which is to be expected perhaps as soon as today, will also provide useful clues as to whether the market is in the process of transitioning to a phase which is less constructive for stocks.

The ETF for the consumer staples sector, XLP, is also positioned at a fairly critical level as it closed yesterday exactly at its 50 day EMA. The volume and momentum characteristics have reached extreme levels and we would expect a recovery soon but the low from early February may need to be tested first.

Computer Sciences (CSC) has a well defined bullish flag formation and the volume characteristics conform to the pattern.

Lyondell Chemical (LYO) recorded a long green candle on heavy volume last week and has since retreated on modest volume. An entry point near the 20 day EMA could provide a short term opportunity on the long side.

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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