The S&P 500 (^SPC) closed at 1326.37 yesterday - its highest level in more than five years. A weak housing starts report released early in the session caused a temporary slump but the market quickly recovered. The impetus that enabled the index to propel itself to a multi-year high came from a Fed governor's comments that resonated with the soft landing scenario that many players are currently subscribing to.

The Treasury market moved down even further yesterday and the five year note is now yielding 4.5% which represents a seventy basis points inversion to short term rates. The small cap sector as represented by the Russell 2000 (^RUT) may be taking more of its directional lead from the inverted yield curve than the soft landing scenario which is driving the larger cap stocks.

The banking index (^BKX) has rallied back to close just above the May levels and invalidated the pattern that presented itself in early August of a possible lower high for the sector. If the index can build further on the breakout the implied message is that fund managers are comfortable that the slowing economy will not be accompanied by distress in the consumer sector. Should a "false breakout" pattern appear in coming sessions this could act as a useful warning that sentiment regarding the severity of a slowdown might be shifting.

TRADE OPPORTUNITIES/SETUPS FOR TUESDAY SEPTEMBER 26, 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.

Expeditors International (EXPD) may have reached a turning point in the pullback pattern that followed the long green candles on September 12 and 13.

Budweiser (BUD) looks vulnerable on the daily chart. The stock could also be a possible casualty as sector rotation seems to be seeing a shift away from the consumer staples sector. The XLP sector fund dropped below its 20-day EMA in yesterday's action on heavy volume.

Comverse Technology (CMVT) may be preparing to retest the $24 level which it last attempted in early June.

It is unlikely that the selling which hit Ford (F) quite hard two week ago has run its course and as the stock has rallied back toward $8.40 there may be further efforts by fund managers to lighten up or liquidate their holdings.

We discussed Walgreen (WAG) last week and suggested that the chart formation was pointing to the fact that further selling was to be expected. The stock dropped another 5% on very heavy volume yesterday but it may be that the lower tail encountered some support in the vicinity of $43.

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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