Equities sold off abruptly again yesterday, allegedly because of some remarks by Fed chairman Bernanke and the ubiquitous "inflationary concerns" that now seems to have become the excuse trotted out by some commentators for almost everything that leads to selling. The indices had reached some fairly obvious resistance levels after last week's recovery and some of these were noted in our weekend commentary. When the short sellers come out in force the market has a tendency to trend very coherently downwards which was the case for the Russell 2000 yesterday which dropped 3.2%.

The 200 day EMA lies just below yesterday's close and if we were to break decisively below it in coming sessions there could be more serious trouble ahead for the overall market.

The S&P 500 dropped 1.8% yesterday after reaching back up to the 50 day EMA on Friday. The chart region between 1260 and 1280 is becoming a congestion zone for this index and more aggressive position traders will be placing bets on both sides of these levels for hopes of riding a substantial breakout.

The Dow Jones Industrialsââ,¬â"¢ proxy DIA, as expected pulled back from the juncture of the 20 and 50 day EMAââ,¬â"¢s that it had reached on Friday. The severity of the drop may be pointing to the fact that the short sellers encountered little resistance yesterday as the bulls could sense where they wanted to take the index and decided to let them get there in a hurry.

Last week we looked at the Bombay Sensex index which reflects trading in the Indian stock market. The action overnight echoed the performance in New York trading yesterday and the index has now broken below the 10,000 level and sits at a fairly critical level in the neighborhood of the 200 day EMA. Evaporating liquidity in emerging markets is causing a lot of capital flight from many other markets that have risen quite dramatically over the last year.

TRADE OPPORTUNITIES/SETUPS FOR TUESDAY JUNE 6, 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.

The housing sector index (^HGX) made a very half hearted effort to pull out of its nosedive but again was one of the big casualties in yesterday's trading.

We mentioned it yesterday, but thought that EBAY deserves another chart today as it seems to have one of the few bullish flag formations that could deliver, even if the broad market continues to sell off.

Some of the investment banks may be temporarily sold out. Lehman Brothers has reached an area of possible chart support and the volume has been declining during the last two sessions while price has been declining.

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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