The divergences and dissonant patterns that we discussed in yesterday's commentary made themselves even more manifest in yesterday's volatile trading session. At one point, the DJIA reached above 13500 in intraday trading but its closing level was 130 points lower at 13383. It was still good enough to register another all-time closing high but if that was the headline item and you failed to read the rest of the article it would have given a very misleading impression of what actually happened with market internals yesterday.

The leading divergence that we have been discussing for several weeks is highlighted in the chart below for the Russell 2000 index (^RUT). This small cap index has been underperforming since the reapid recovery from the late Februay/early March correction. The close below the 50-day EMA has recorded a clear violation of the upward trendline through the lows since early March and the index now faces a key test ay 810.



The chart for the Nasdaq Composite index (^IXIC) illustrates the inability of the broad market to enjoy the bullish dynamics that are still propelling many of the large cap issues. The index fell by 0.8% and came to rest below the 20-day EMA and at a key support/resistance level near to 2525. On a day when the overall equity market rushed out of the starting gate and the S&P 500 touched a new multi-year intraday high the lack of follow through and the divergences from the smaller cap issues suggests perhaps a growing lack of conviction about the sustainability of the recent series of record highs from the DJIA.



The broker/dealer sector index (^XBD), one of our key macro market indicators, also appears to be in the process of violating an upward trend line as it has had difficulty following on from the recent historic high just above 258. This sector and some of its key constituents including LEH, MS, and BSC will be on our Watch List in the coming sessions. Lehman Brothers, which was discussed yesterday, is thought to have a rather large exposure to the mortgage derivatives market, and the weak housing data yesterday may keep the stock under some pressure.



The retail sector (^RLX) produced the break below rather bearish chart pattern that we were anticipating in last week's commentary.



TRADE OPPORTUNITIES/SETUPS FOR WEDNESDAY MAY 16, 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.

In addition to Lehman Brothers (LEH) that we examined yesterday and which continued to see price erosion in yesterday's trading, we are also monitoring the emerging price pattern for Bear Stearns (BSC) The action yesterday raises the possibility of a futher break below the price congestion pattern of the last month, although the 200-day EMA which lies at exactly yesterday's close may trigger some buying support.



We have used a longer time frame for the chart for Ford (F) to illustrate how the last two very bullish sessions have brought the stock towards a retesting of the late November 2006 high.



Few of the charts that we reviewed from our overnight scanning were providing clear signals this morning. Indeed this kind of market action of increasing intraday volatility favors the day trader rather than the swing trader who is using EOD charts for analysis. One chart that did grab our attention for the long side is for Monster Worldwide (MNST) which has the right volume and MFI characteristics for a continuation higher out of the flag like 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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