There was an interesting divergence yesterday between the small cap index, the Russell 2000 (^RUT) and the larger cap indices including the S&P 500 (^SPC). As can be seen from the chart below the S&P 500 registered a marginal decline and a tiny body doji candlestick was formed. Yesterday's intraday high failed to reach above the high from Monday and yet again the index closed just below the all time historic high from March 2000.

The Russell 2000 (^RUT) played more catchup in yesterday's trading as it outshone the S&P 500 and the DJIA and recorded a 0.8% increase. The upward move also which addresses the issue that we mentioned yesterday as the index is now beginning to display evidence that it is breaking away from the price region that had formed in February and which had until yesterday seemed to be setting up a potentially dissonant pattern for the overall market.

If the Russell 2000 can maintain its renewed vigor then the underlying dynamics of the market should support further gains for the larger cap indices.





The yield on the ten year Treasury note moved up another four basis points to close at 4.83% and a retest of the January high yields just above 4.9% is to be expected in coming sessions. The action in the Treasury sector conflicts with opinions amongst some commentators that the US economy slowdown will help the Federal Reserve to begin an easing stance soon. Also potentially more worrying is the possibility that foreign investors may be pulling back slightly in their demand for US government debt.



TRADE OPPORTUNITIES/SETUPS FOR WEDNESDAY MAY 23, 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.

Parametric Technology (PMTC) moved above the 50 day EMA on above average volume and could be targeting the $20 level again in coming sessions.



The chart for Toll Brothers (TOL) has positive momentum divergences and yesterday's long green candlestick on heavy volume penetrated the 200 day EMA. The most recent similar move through this level on April 26 brought about a steady retreat but the dynamics could be more favorable this time around.



Zebra Technologies (ZBRA) broke above the two short term EMA's on above average volume and could be setting up for an attempt to reach back above $41 from which it gapped down at the end of April.



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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