The tiny body Doji candlestick that was registered yesterday on the chart for the Nasdaq Composite index (^IXIC) highlights the uncertain manner in which equity traders are construing the economic backdrop. The data is confusing, the dollar continues to slide and the Treasury markets are not buying the inflation scenario that Fed governors seem to be worried about.

There is a fair degree of complacency about the possibility that the housing slump could turn into a major drag on the US economy with global repercussions. In addition many hedge funds are engaged in highly leveraged carry trade strategies and further dislocations in the currency market could precipitate increasing volatility and instability in the international money market.

The Euro, British pound and the Swiss Franc are showing signs of an accelerating breakaway.

The housing sector, somewhat surprisingly, surged yesterday as homebuilders saw very sharp moves upwards. As the chart for the housing index (^HGX) shows the 3.4% gain brought the index above the 200-day EMA for the first time since April.

The yield on the ten year Treasury note (^TNX) is continuing to probe levels below the trading range that had been in effect during most of October and November. The yield broke below 4.5% yesterday and suggests that Treasury traders are ratcheting up their expectations for a serious slowdown in economic activity.

TRADE OPPORTUNITIES/SETUPS FOR FRIDAY DECEMBER 1, 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.

Several retailing stocks experienced bearish range expansion yesterday. When the range expands to the downside on above average volume and there is a preponderance of stocks from the same sector this can be a useful early warning signal on the short side. American Eagle (AEOS) illustrates the pattern and similar formations can be seen on charts for ANF, COST, GPS, JCP, JWN, KR and KSS.

Merrill Lynch (MER) dropped below its 20-day EMA on above average volume and there are some negative divergences on the momentum and money flow charts.

We recommended Verisign recently in the context of the bullish flag formation that was evident in mid November. The pattern has undergone a continuation/extension pattern and yesterday the stock surged by more than seven percent on almost four times the average daily volume.

Most of the homebuilders surged yesterday and Pulte Homes (PHM) was the standout performer with an 8.6% gain on twice the average daily volume.

The rally took the stock right back to potential resistance at $34 and we will be monitoring the stock in coming sessions to see how much of yesterday's rally was due to short covering and how much genuine new accumulation is taking place.

As we noted earlier this week Men's Warehouse (MW) looks vulnerable to further weakness.

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.

Disclaimer
The purpose of this article is to offer you the chance to review the trading methodology, risk reduction strategies and portfolio construction techniques described at tradewithform.com.  There is no guarantee that the trading strategies advocated will be profitable. Moreover, there is a risk that following these strategies will lead to loss of capital. Past results are no guarante of future results.  Trading stocks and CFD's can yield large rewards, but also has large potential risks. Trading with leverage can be especially risky. You should be fully aware of the risks of trading in the capital markets. You are strongly advised not to trade with capital.