Following the successful testing of the 50-day EMA which we discussed yesterday, the Russell 2000 (^RUT) found renewed vigor and caught up some lost ground against the large cap indices. The small cap index gained 1.5% and closed within six points of its all time closing high that was attained on April 26.



The Nasdaq Composite (^IXIC) gained one percent and closed marginally higher than its recent and previous multi-year high that was registered on April 27. We have highlighted the quite extraordinarily steep ascent of the trend line through the lows from the bottom of the early March correction.

Sentiment indicators are, from a contrarian point of view, quite bullish and it seems there are still too many bears for a market shakeout to occur. While widespread skepticism remains about the spate of record high closings for the DJIA we suspect that we are likely to see still higher prices. The approach of the all time high for the S&P 500 which could happen any day will also provide an important insight into the mindset of the index traders.



The exchange traded sector fund, RTH, has been showing some fairly erratic intraday price moves over the last few sessions. We mentioned recently that several of the individual retailing stocks are showing deteriorating technical conditions and the sector fund reflects the tug of war that is affecting the outlook for the consumer sector in general and the retailers in particular.



TRADE OPPORTUNITIES/SETUPS FOR THURSDAY MAY 3, 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.

Meritage Homes (MTH) is in a sector that we are not entirely comfortable with from a technical perspective but the chart for the stock reveals a fairly orthodox bullish flag/pullback formation.



Nortel (NT) has been in the doldrums for so long and despite the reverse split that boosted the adjusted price tenfold there has been a dearth of positive developments for holders of the stock. Yesterday the stock surged by almost nine percent on heavy volume. Although yesterday's close came to rest exactly at expected resistance provided by the intersection of the 50- and 200-day EMA's the upsurge in momentum could carry forward soon to the $28 level.



Office Depot (ODP) performed an interesting reversal yesterday after registering an inside day on Tuesday. We will be monitoring today for short-term follow-through.



We noted recently that the chart for Schlumberger (SLB) contains several shooting star candlesticks and there is evidence of distribution taking place. In our overnight scanning this was one of the few charts that looks to be obviously promising on the short side.



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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