The intraday chart pattern for many indices and individual stocks had a pronounced "V" formation from yesterday's trading. The S&P 500 plunged in the first few minutes of trading yesterday morning but bounced just above the 1380 level which as the chart shows is an area of previous chart support/resistance. The absence of bids in the futures pits left a liquidity vacuum on the open but short covering propelled the index back quite rapidly. The index moved back above the breakeven level for a while but drifted lower into the close.

Looking below there is further support at 1360 which also coincides with the 200-day EMA and below that there is strong support at 1280. We are not suggesting that this is where we are headed in the near term but in the longer term, given the technical malaise, we would not be surprised to see a test of the 1280 level. This poses a real question as to whether we can mount another rally to challenge the old 2000 high first before we slump or whether we go down first and then recover into a late year rally. There is of course another possibility which is that we're headed much lower and will not be seeing a challenge to the 2000 high any time soon - if there is a liquidity implosion caused by the collapse of a high profile institution that could present itself as more probable than it seems at the moment.



One of the themes from yesterday's trading was concerns about the yen carry trade. Monitoring the intraday action yesterday it became apparent that early waves of yen buying seemed to coincide with the precipitous drop in the equity indices. As we have indicated the footprint of the major hedge funds can be seen in the drama of the last few days and volatile movement of the currencies can be a warning signal for big moves in equities.

Looking at the chart for the Euro we see that the currency is approaching a test of the $1.33 level. One possible interpretation of the longer term possible formation for the Euro is that we retreat after a re-test and build the handle of a cup and handle formation and then head much higher on the Euro. This would support the scenario of a recovery sooner rather than later on equities before another slump - but that it is highly conjectural and we would not bet the ranch on it.



The uptrend in the Nikkei 225 has been clearly violated in the last two days of trading, and in Friday’s action we see no evidence of a bounce.



The chart below shows the Bombay Stock Exchange index (^BSESN) which sold off again in Friday's trading although it noticeably registered an inside day in relation to Wednesday's big down move.

Why should we be particularly concerned about an Indian equity index? Our reasoning is that liquidity/risk decision making by large funds is likely to show up first on the margins of the global financial system in such an inter-linked world. The Sensex index provided a tip off for the May 2006 mini-panic and it also showed the way again over the last several sessions preceding the Shanghai drop that supposedly triggered the latest mini-panic.



TRADE OPPORTUNITIES/SETUPS FOR FRIDAY MARCH 2, 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.

We have focused on Lehman Brothers (LEH) in this week's commentaries. In yesterday's trading the stock dropped fast along with the rest of the market in the early going but as is clearly evident - support and short covering kicked in near to $70 and the stock recovered aggressively. Whether we have seen a near term bottom is another question that we hesitate to answer at this juncture.



Alcan moved up more than three percent on almost three times the average daily volume and the chart shows very little damage from the last three days of market turbulence.



The chart for IBM is one of the more interesting we reviewed this morning. We commented some time ago on the lower high and the clear bearish flag formation that we have highlighted. The stock performed a technically precise test of the 200-day EMA and breakout level yesterday and again there was a combination of buying support and short covering that allowed the stock to regain some poise. The pattern on the chart is a good template for the overall condition of many institutional favorites.



The chart for Martha Stewart (MSO) is displaying some positive technical divergences.



Oracle (ORCL) also has some indications that it could be preparing to move higher - as long as the overall market stabilizes.



We have included the chart for Tesoro (TSO) to show how remarkably unaffected the stock has been by the trading conditions in the overall market over the last few sessions.



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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