One of the main themes of yesterday's trading as revealed on many charts was that buying support and/or coordinated short covering emerged as several stocks and indices tested significant lows. The contrary cross currents were again much in evidence as the market digested a further retreat in Treasury yields, some notable earnings warnings from Alcoa and Lucent and a terrorist attack in Mumbai, and the afternoon rally could be pointing to the beginning of an attempt by the bulls to regain control of the agenda.
As discussed yesterday the Nasdaq 100 dropped below the June 2006 and the October 2005 lows but stopped short of the July 7, 2005 lows. Volume on the QQQQ proxy was above average and if we can see some follow through we may have witnessed a near term turning point.
The S&P 500 (^SPC) retreated to the 1260 level intraday which coincided with the 200 day EMA and then managed to rally back to 1272 later in the session. The formation on the SPY chart is supportive of the view that we may be bracing for a rally as the pullback channel and volume characteristics are positive.
The chart for the retail sector (^RLX) which has been performing in a similar fashion to the Nasdaq 100 for some time broke to a low at 437 yesterday but also found some support as revealed by the long lower tail. However the index failed to show the recovery that was seen in most of the other indices and closed down 0.5% for a new 2006 low.
The ETF for the Consumer Staples sector (XLP) reveals one of the most bullish looking charts for the year so far. Often seen as a defensive play or safe harbour for institutional money that is anxious about exposure to growth and technology the clear breakout pattern suggests that we would not be surprised to see the sector continue to benefit from sector allocation strategies.
TRADE OPPORTUNITIES/SETUPS FOR WEDNESDAY JULY 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.
We mentioned Hansen Natural (HANS) in yesterday's column and noted the precipitous drop on Monday on very light volume. Remarkably the stock reversed almost completely yesterday also on light volume. This type of shakeout/reversal behavior highlights the fragile nature of market sentiment and may also be an early indicator that a major move for the overall market could be imminent.
ASYT could be on the verge of an upward breakout.
ADI rose 3.5% yesterday on more than twice its average volume and could also be showing shakeout behaviour.
KLAC moved up more than 8% in a very heavy volume session (four times the 15 day moving average). The surge may not only be attributable to buy stops being triggered from exisitng short traders but may well have served as a wake up call for other position traders that have become too accustomed to price attrition in the sector.
Stryker (SYK) could be close to its zenith in an ascending and bearish pullback channel.
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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