Along with many of the charts that we looked at from yesterday's trading, the S&P 500 cash index (^SPC) recorded an inside day in conjunction with a narrow range session. There was little movement overall in the major indices yesterday except for the Dow Jones Industrials which fell back 48 points largely on a disappointing earnings statement from Hewlett Packard.

The gold and silver index (^XAU) rallied quite strongly yesterday after the index had retreated almost exactly to the 50-day EMA in the previous session. One of the notable trends that has come to the attention of some analysts is the quite marked underperformance of the gold mining stocks in recent months vis a vis the price of the precious metal.

This sets up the possibility of a pairs arbitrage involving going long some of the stocks (NEM,ABX,AU,KGC,GG) while shorting GLD, the exchange traded fund that tracks the price of gold. However, as with pairs trades in general there is no assurance that mean reversion will soon restore the historically observed ratios between the two sides of the trade.





The oil services index (^OSX) appeared to have violated the upward trend line through the recent lows that we have drawn as well as the conjunction of all three of the EMA’s that we track. However, yesterday’s long green candlestick moved the index back above all of the EMA’s as well as calling into question the trend violation. Valero (VLO) was one of the better performing stocks in the sector as it jumped 3.4% in a possible breakout pattern.



TRADE OPPORTUNITIES/SETUPS FOR THURSDAY FEBRUARY 22, 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.

In yesterday's commentary we drew attention to the chart of Arch Coal (ACI) and commented on the triangular (pennant) formation and narrowing of the volatility bands and the intersection of both the 20- and 50-day EMA's. We suggested a breakout was imminent and the four percent upward move obliged but noticeably the volume was not above average.



The formation for Children's Place (PLCE) has a somewhat similar pattern to the chart above for ACI and again a breakout would seem to be probable in the near future.



Kohl's Stores (KSS) registered a tiny inside day candlestick yesterday and there are some negative divergences.



News Corporation (NWS) should be monitored for possible corrective behavior as there has been a fading of momentum and money flow.



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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