An inside day formation was recorded for the S&P 500 cash index (^SPC) yesterday and only six points separated the intraday low and high. Evidence is mounting that the momentum that has powered the strong performance of the indices since Labor Day is beginning to dissipate and this can be seen on the SPY and QQQQ proxy charts.

As we observed earlier in the week several banking stocks are beginning to correct and the index for the banking sector (^BKX) is showing signs of more volatile behavior.

As well as indications that the commercial banks may be reaching an interim plateau there is also evidence that the investment banks and brokers may have already discounted all of the good news. E-brokers such as E Trade and Schwab have hit recent turbulence and some of the investment bankers such as Lehman (LEH) and Goldman Sachs (GS) could be in need of a rest after strong recent rallies.

TRADE OPPORTUNITIES/SETUPS FOR FRIDAY OCTOBER 20, 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.

Franklin Resources (BEN) is displaying quite notable divergences and distribution

We noted earlier in the week that Bank Of New York (BK) was one of several banks that had run into overhead resistance. The gap down yesterday culminated with a green spinning top candlestick and a 2.7% loss for the session.

The chart for AVID suggests that the stock is entering an area of vulnerability. In particular the volume during the "recovery" period has been below average and dwarfed by the large gap down volume.

Costco has retraced most of the high volume surge from October 12 and is now approaching the 200-day EMA which lies just below yesterday's close. If a bounce materializes it would be prudent to take profits quickly as the chart has some characteristics that suggest there is a possibility that the pattern could also transition to a bull-flag failure.

Louisiana Pacific (LPX) has a mini bull flag pattern.

The volatility bands for Omnivision (OVTI) are highly constricted and the chart pattern looks like a break above the recent range may be imminent.

Pan American Silver (PAAS) should be monitored today for continuation of the move above two moving averages yesterday.

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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