Friday’s rally in the equity markets coincided with an oversold condition, a retreat in Treasury yields and the reaching of certain key chart levels. Many of the major indices including the S&P 500 and Nasdaq Composite bounced almost exactly at their respective 50-day EMA's. The week ahead promises to be a fairly critical one in providing insight into what we should expect for the intermediate direction of the overall market.

The chart below shows how vital it was for the Russell 2000 (^RUT) that the relief rally occurred on Friday. Thursday's close had brought the index to a coincidence of both the 50-day EMA and the uptrend line that we have drawn.

The other level that we have annotated with the small box is the low from May 1 just below 808. If we were to see a close below that level, when Treasury traders embark on another testing of the upper limit of bond yields, then the downside action in equities could turn into a rout.



Very similar reasoning to our discussion above applies to the Nasdaq Composite index (^IXIC). Once again the relief rally on Friday kicked in at the 50-day EMA level and as we have also suggested with the boxed candlestick the May 1st low of 2510 would appear to be a key level.

Drawing trend lines through the lows on this chart would reveal that Thursday's close registered a violation of the upward line. Friday's bounce puts the interpretation of that "violation" into abeyance until we see another bout of weakness in equities when Treasury yields push ahead again.



It hardly needs to be said but the key to this week’s trading will be what happens to long term bond yields which obviously feed into other interest sensitive sectors such as mortgage rates, the utilities and the money center banks.

The chart that plots the yield of the thirty year bond (^TYX) reveals even more strikingly than the equivalent for the ten year note how dramatically yields have risen since late February. Yields on February 27 touched 4.62% which was sixty basis points below Friday’s closing yield.

One of the more intriguing patterns on the chart are the two sections that we have marked where a constricted range gave way to sudden upsurges in yields suggesting that the markets have been taken by suprise at the declining appetites for long term Treasuries. When this is combined with the rather pronounced topping action in the Dow Jones Utilities that we discussed in Friday’s commentary it suggests that there is considerable re-appraisal of market conditions ( with re-allocation implications) being made by asset managers.



TRADE OPPORTUNITIES/SETUPS FOR MONDAY JUNE 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.

Century Aluminum (CENX) registered more than four times its average daily volume on Friday and the proximity to the 50-day EMA and a key chart level suggests that buying support may have been at work.



Florida Rock Industries (FRK) registered a green engulfing candlestick on Friday and the volume and money flow charts suggest that the stock may be ready to mount another attempt to test the top of the trading range.



Maxim Integrated (MXIM) could be headed towards $33.



The chart for Varian Medical Systems (VAR) shows some positive MACD and MFI divergences.



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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