The chart for the Russell 2000 (^RUT) over the last two sessions reveals an almost classical support testing pattern where the long red candlestick from Monday's trading, which broke down below the 20-day EMA, went on yesterday for a testing of the 50-day EMA, and also of the uptrend that extends through the post sub-prime recovery lows. The test appears to have been met with a buying support as the index touched the key level. One day's action is not sufficient to convince us that we have seen the last of the sub par performance of the small caps in relation to the larger cap S&P 500 and DJIA

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As if to highlight the concerns that we have been expressing regarding the Russell 2000, the chart for the Nasdaq Composite (^IXIC) shows that another test was made yesterday for this index too. The Nasdaq test also resulted in a long lower tail indicating buying support but this time the test was for the 2520 chart level coinciding with the shorter term moving average rather than for the much lower placed 50-day EMA which the Russell index was testing.



The release of the April employment report on Friday could help to resolve the noticeable congestion pattern that has been developing with respect to the ten year Treasury note. As the chart reveals the yields have been confined within a narrow channel between 4.6% and 4.7% for almost three weeks. Also clearly apparent on the chart is the April 17 break below the uptick in yields. This violation of the trendline has coincided with the market’s recent concerns about more signs of economic slowdown.

The employment data could settle the question, in the intermediate term, of whether the uptrend in yields will be restored or whether the concerns that came to the fore with last Friday’s anemic GDP data will prevail.



TRADE OPPORTUNITIES/SETUPS FOR WEDNESDAY MAY 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 recently suggested that the pullback pattern for EBAY suggested a short trade looked feasible. A typical bearish flag pattern would suggest that yesterday's break out below the channel should have been more decisive. The long lower tail that shows support emerging at the 50-day EMA puts the flag interpretation into question.



One of our recent short recommendations OfficeMax (OMX) has performed very much in line with our expectations of reaching down to $48. Yesterday's attainment of $48 intraday completes the pattern and could be a level from which a near term recovery might materialize.



Yesterday's announcement that the Rupert Murdoch media empire was bidding to buy Dow Jones had quite a positive effect on the overall market. As can be seen on the chart for News Corporation (NWS) the bid was less appealing to current institutional holders of the stock. The stock could see further attrition but the area in the vicinity of the $22 on the chart has seen recent and long term support.



Pacific Sunwear (PSUN), in line with a number of retailing stocks is showing clear signs of distribution. Some support is to be expected near the 200-day EMA at 19.65 but the chart formation has some characteristics that are often precursors to a price avalanche pattern.



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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