The broad equity market surged ahead yesterday with the DJIA and the S&P 500 recording historic highs. The theme that we touched on yesterday of whipsaw reversals following recent market downthrusts asserted itself with a vengeance in yesterday's session and we suspect that a great deal of the momentum behind the move was index traders who were short the market anxiously covering (and reversing) their positions.

This supposition is supported by the relatively underwhelming volume for such a powerful move. As the daily chart for SPY shows, the volume yesterday was actually below the moving fifteen day average and also below the volume that accompanied Tuesday's sell-off.



One of the big moves yesterday was seen in the banking sector as the ^BKX index jumped 2.5%. The close on the chart below shows that we managed to move back above the 200-day EMA (green line) but still need to overcome the 50-day EMA (red line). Once again the anecdotal evidence supports the notion that short covering may have been a large factor in the strong rally. Earlier in the week we commented on the fact that Wells Fargo appeared to be breaking down as it dropped below its long term moving average. In yesterday's reversal activity, WFC also moved back to just below the 50-day EMA echoing the action in the sector index.



The retail sector was clearly one of the principal beneficiaries of yesterday’s rally and may well have been a major contributing factor to the strong price moves. The retail sales data that was released early in the session appears to have been the trigger for the bulls to drive the index futures forward with the accompanying short covering. The sector itself gapped on the open and has reached back to within a few points of its recent high close and this time the volume shows far more conviction than can be seen on several of the other sector and index charts.



As discussed yesterday gold has a formidable hurdle to overcome at $660 which equates to $66 for the exchange traded fund, GLD. As can be seen yesterday we still need to adopt a wait and see attitude as the inscrutable spinning top candlestick leaves the matter unresolved.



TRADE OPPORTUNITIES/SETUPS FOR FRIDAY JULY 13, 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.

Implementing a long position based on yesterday's discussion of Schering Plough (SGP), which had moved above a short term line of resistance on heavy volume in Wednesday's session would have produced a nice one day profit opportunity, especially as the open yesterday was right in line with Wednesday's close.



We commented earlier in the week that Fuller (FUL) had a bull flag formation and may be preparing for a further advance. The stock moved ahead more than five percent on the session and we closed out our postion. Once again the volume picture questions the power behind the move as it is customary to see above average volume when price breaks out of the channel from a flag formation.



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.

Disclaimer
The purpose of this article is to offer you the chance to review the trading methodology, risk reduction strategies and portfolio construction techniques described at tradewithform.com. There is no guarantee that the trading strategies advocated will be profitable. Moreover, there is a risk that following these strategies will lead to loss of capital. Past results are no guarantee of future results. Trading stocks and CFD's can yield large rewards, but also has large potential risks. Trading with leverage can be especially risky. You should be fully aware of the risks of trading in the capital markets. You are strongly advised not to trade with capital.