The Nasdaq Composite index (^IXIC) eroded further yesterday but is reaching a pivotal level of chart support which coincides with the 50-day EMA. Despite the negative tone to the proceedings yesterday a case could be made that the technical conditions could be improving as far as a bullish outlook is concerned.

The Russell 2000 (^RUT) registered an inside day yesterday and the index's decline of 0.9% was pretty much in line with the declines of all of the broad equity indices. If we were to see relative underperformance from the small caps and a definite violation of the 50-day EMA for the Russell 2000, this would suggest that the bears might be gaining some traction but in the meantime the most likely way forward is further sideways consolidation.

The semiconductor sector, as represented by SMH has retreated to the bottom of its long standing range. As we noted in our weekend commentary the Nasdaq has been on the receiving end of a lot of sector churning in the overall market and a contributing factor to the index’s inability to break out of its two month trading range has been the lack of leadership from the semiconductors.

TRADE OPPORTUNITIES/SETUPS FOR TUESDAY JANUARY 23, 2007

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.

Last week we cited the very constricted range for Career Education Corp (CECO) and pointed out that the MFI chart suggested that an upward breakout could be imminent. The stock gapped up yesterday gaining 5.7% but ran into resistance at the 200-day EMA.

Northern Trust (NTRS) appears to be in the process of forming a bear flag/pullback pattern and may find it difficult to make much progress beyond $61.

Penn National Gaming (PENN) is revealing some negative divergences and the long upper tail shows that there is overhead resistance at $43.

Shanda Interactive (SNDA) appears to be over extended and there are indications of distribution.

United Parcel (UPS) dropped one percent yesterday which was in line with the overall market but we are encouraged by the long lower tail and the MFI chart to believe that a tradable bounce seems likely.

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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