There were several very interesting developments revealed yesterday on the index and sector charts we track each day. Let us begin with what may be the most significant which relates to the Treasury market. We normally reference the chart for the ten year note as that has the greater liquidity but today we want to look at the yield on the thirty year bond. As we have annotated on the chart there have now been two closes above the five percent level. On the previous occasion when we were at similar levels the yield actually pentrated the five percent barrier but was unable to close above it and subsequently retreated.

What is also noteworthy, and this is more apparent on the chart for the ten year note is the prolonged period of congestion, which we commented on several times, that extended from mid April to mid May and since breaking out from that congestion zone the yield has moved up almost vertically.

Two factors may be at work in this respect. The first relates to the more upbeat tone to some of the recent economic data, including yesterday's home sales reports, but the second factor which we also alluded to recently could be a diminution in the appetite of foreign central banks, especially the Bank of China, to seek out long term US government debt. With either scenario it could provide a deteriorating background for equitites. It was the run up in yields just over a year ago which helped to precipitate the May 2006 correction.



The Nasdaq Composite (^IXIC) dropped by 1.5% yesterday but the violation of the upward trendline that took place on May 10th followed by the sideways pattern is now in jeopardy of being confirmed as having intermediate term implications.



The fall in the S&P 500 (^SPC) of one percent was less severe than that sustained by the small cap Russell 2000 (^RUT) as well as the Nasdaq as we have just seen. The index came to rest at the juncture of the very steep upward trend line that has been in place since the markets quickly got over their concerns about the sub-prime mortgage problems. It is the deteriorating interest rate environment for stocks that could now take center stage and which is why we will be monitoring the Treasury market in particular and the fixed income market in general.



TRADE OPPORTUNITIES/SETUPS FOR FRIDAY MAY 25, 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.

The ETF for the utilities sector, XLU, finally succumbed to selling pressure as the negative divergences that are apparent on both the MACD and MFI chart were indicating distribution. The outlook for interest rates is clearly a major factor here.



As already intimated the negative divergences that had been arising on several key sector charts over the last few weeks gave way to rather notable weakness. The semiconductor sector fund, IGW, which at the end of April produced a breakout has now fallen below some key levels and closed below its 50-day EMA on almost twice the average daily volume.



Our commentary of May 14 made the following observation about the chart for Intel (INTC). "The back to back spinning top candlesticks with signs that momentum is waning and distribution has begun. The long upper tail to last Thursday's action could also be indicative of a double topping pattern in relation to the January high."



Entergy (ETR) has dropped swiftly and there is clearly downward momentum that could see further price erosion eventually although it may try to stablize beforehand.



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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