The indices made a remarkable turnaround in yesterday's trading. After a report showing much weaker new home sales than were expected the indices dropped quickly hitting their lows around 10:00 a.m. From then on equities began a steady recovery which brought most indices back to essentially unchanged levels for the day.

The chart for the Nasdaq Composite (^IXIC) again illustrates the value of observing the 50- and 200-day EMA's as support/resistance levels on the daily charts. The index precisely tagged the 50-day EMA yesterday at which point it registered its intraday low for the session. The action yesterday supports the notion that since the recovery began from the selling climax on March 5, the short sellers have been constantly ambushed each time they have tried to seize some bad news in an attempt to take the indices down. While a market that continues to outwit the short sellers can act bullishly there will come a point when the short sellers will retreat to the sidelines and index traders that are net long will require conviction that their support for the market is warranted.



We do not normally quote from analyst's reports but the following caught our eye from today's edition of the London based Daily Telegraph.

"America's housing slump is more serious than widely believed and risks setting off a full-scale global crisis, Morgan Stanley has warned in a note to clients. The US bank said the sudden deterioration in the sub-prime sector knocked away the "cornerstone" of US household consumption and threatened contagion to a broader nexus of complex derivatives.

"US sub-prime has the potential to turn into a real financial crisis. We do not make this assertion lightly," said Teun Draaisma and Graham Secker, the bank's two chief equity strategists for Europe.

It is not common to find a large investment bank issuing such a stark warning.



The Dow Jones Utilities index (^DJU) closed at an all time closing high in yesterday’s trading but as the chart reveals it has to challenge the previous intraday high at 504 that was recorded on February 26 - the day before the sub prime correction began.



TRADE OPPORTUNITIES/SETUPS FOR TUESDAY MARCH 27, 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.

The chart for E Trade (ETFC) has a rising wedge pattern and there is evidence of strongly positive money flow.



First Data Corporation (FDC) peeked above its early 2007 high in yesterday's trading on more than twice the average daily volume. The chart pattern suggests that, even if there is an immediate period of consolidation the intermediate direction looks to be one where further gains should be expected.



We have changed our stance on Google (GOOG). Eight days ago we thought the pattern looked as though the 200 day EMA was about to be violated on the downside. In the last week the stock has shown signs that it could be preparing to moving higher. The break above the 50-day EMA yesterday needs to be confirmed in today's trading.



Sysco (SYY) moved above both the 50- and 200-day EMA's yesterday on substantial volume and a target of $35 looks feasible in coming sessions.



Timberland (TBL) is in a very constricted volatility range and there is evidence of a basing pattern close to completion with accumulation.



Last week we pointed to the nested bear flag formation for Qiao Xing Universal Telephone Inc (XING). Yesterday the stock dropped by more than four percent on substantial volume and there may be more downside potential towards $15.



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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