Our recent concerns about the growing divergences between the small cap Russell 2000 index (^RUT) and the larger cap S&P 500 and DJIA came home to roost in yesterday's trading patterns. The Russell 2000 dropped by 1.8%, falling below its 20-day EMA and registering a rather nasty looking red candlestick that was also a downward trend day.

The market appears to be quite vulnerable to any evidence of slowing in the consumer sector and the implications for corporate profitability. With other key data being released today and later in the week the stage could be set for a pick up in volatility as we discuss below in connection with the VIX.



Yesterday's trading revealed several rather notable divergences. We have already commented on the small cap/large cap issue but there was another chart that caught our attention during this morning's analysis. As the chart for the CBOE Volatility Index (^VIX) reveals there was a noticeable uptick in volatility yesterday that broke through the apex in the very obvious triangular formation.

While false breakouts are all too common it will be worth monitoring the VIX closely this week as a confirmation of the breakout could be pointing towards an important market inflection point.



In yesterday’s commentary we pointed to the pattern, seen on the chart below for IGW which tracks the semiconductor sector, that we have been focusing on recently. The expected further decline materialized yesterday and now raises the specter that the recent price behaviour may have been a "false" breakout.



Retailers were amongst the sectors that showed relative weakness. The exchange traded sector fund, RTH, dropped below its 20-day EMA in a trend day on heavy volume.



TRADE OPPORTUNITIES/SETUPS FOR TUESDAY MAY 1, 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.

Compuware (CPWR) looks to be headed towards the 50-day EMA around $9.40.



Target (TGT) was one of the retailers that exhibited downward range expansion on heavy volume - as the chart indicates this also followed on from Friday's inside doji formation.



Quanex (NX) has several long upper tails as momentum and money flow have been fading



Another retailer Abercrombie and Fitch (ANF) reveals the same pattern template as Target although the stock still remains above the 20-day EMA.



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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