The market reacted negatively to poor retail sales data yesterday which suggested that the consumer sector could be less buoyant than the advocates of the smooth landing scenario have been counting on. Evidence of higher import prices and also the second highest trade deficit ever also raised concerns that the Federal Reserve's room for maneuver may be somewhat inhibited.

The patterns on the equity index charts reveals a clear trend day in which the 20-day EMA's were in some cases breached, but in the case of the S&P 500 (^SPC) that test may come in today's session. As we commented in yesterday's column there are numerous individual stocks and sectors that look over-extended and fund managers could not be blamed for wanting to lock in some of the gains from the exceptional bullish recovery that followed the late February plunge.

The key level we will be watching for the S&P 500 in coming sessions is 1460 which coincides with a major chart support/resistance level and also the position of the 50-day EMA. We may not even come down to test that level if the positive dynamics reassert themselves quickly but if the market drifts lower the uptrend would be in jeopardy if the market closes decisively below 1460.



The chart for the Russell 2000 (^RUT) reveals the solid red candlestick that opened on its high and closed on its low and which penetrated the 20-day EMA. The index has been under-performing the large cap indices for some time and yesterday was no exception as the index lost 1.9%. We shall also be watching this index to see whether a test of the 50-day EMA meets with clear evidence of buying support as it did at the beginning of May. A failure to rally off the 50-day EMA would suggest an underlying change in dynamics for the equity market as a whole.



The chart below for the CBOE Volatility index (^VIX) shows a somewhat muted reaction yesterday given the magnitude of the moves in the equity indices. The overall pattern is quite intriguing as it shows that the volatility measure has remained above 12 since sell off that began on February 27. Despite a series of record high closes on the DJIA and other indices traders seem to be adjusting to a higher level of anticipated volatility than was in place for most of the second half of 2006.



TRADE OPPORTUNITIES/SETUPS FOR FRIDAY MAY 11, 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.

American Tower (AMT) moved below both the 20- and 50-day EMA's yesterday on heavy volume and this is within the context of Wednesday's inside day pattern.



Earlier in the week we commented that Cymer (CYMI) could run into further selling as it approached the 200-day EMA at the top of the pullback channel. The stock dropped four percent yesterday but the volume was not significantly higher than the average and we would suggest remaining flat until the pattern unfolds further.



51job (JOBS) behaved in a contrary manner to the overall market yesterday as it moved up 1.5% on twice the average volume following an inside day on Wednesday



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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