From time to time we have commented on the discrepancy between the chart formations for the S&P 500 cash index and the exchange traded proxy SPY. The trading on Friday illustrates how these two instruments can show interesting divergences. SPY gapped up on the open and despite closing below its open (and thus recording a red candlestick) it managed to finish at a new multi-year high.

The S&P 500 cash index (^SPC) shows a green candlestick from Friday's trading but notably the intraday prices all remained below the closing high from May 5th of 1325.76. While the candlestick for the cash index is best described as a shooting star the SPY pattern resembles the hanging man formation.

We hesitate to attribute great significance to this disparity but it does point out that the trading activity of the pure index traders who, on Friday, were focused on the May chart levels, were not aligned with the constructed values of the composite index that result from the behavior of the index's components. Our pattern analysis revealed few bullish setups and several that are suggesting corrective action but we sense that the index traders are not yet ready to rollover on taking out the May highs.

The raw material sector fund XLB spent most of last week in a recovery following last Mondayââ,¬â"¢s drop of 2.7% on heavy volume. It would not be surprising to see a resumption of selling during the course of this week.

Over the last couple of weeks the principal beneficiaries of the major slump in the energy stocks have been the consumer related stocks including retailers and even homebuilders. The ETF for the consumer discretionary sector has pushed right back to possible resistance at the May highs and Friday's Doji could be signaling that the sector may need a rest.

TRADE OPPORTUNITIES/SETUPS FOR MONDAY SEPTEMBER 18, 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.

International Paper (IP), as one of the components of the raw materials sector fund XLY has endured two days of strong selling and may have further to go before there is meaningful buying interest.

Intel (INTC) appears to be encountering difficulties at the $20 level which also corresponds almost exactly with the 200-day EMA.

The chart for Procter & Gamble (PG) reveals a shooting star on Friday and this could be a marker for the onset of a possible correction.

We would suggest monitoring Forest Labs (FRX) for signs of incipient weakness as the chart is revealing negative divergences.

Research in Motion (RIMM) would be another candidate this week for further signs that it has run into resistance.

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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