The early buying subsided during the course of yesterday's session and the indices, in most cases, closed with minor losses. The Russell 2000 (^RUT) was the under-performer yesterday as an early rally faded and the index gave back its gains and then some to close down 1.1%. Yesterday's price movements provided a case book study of stocks that are in a correction mode will often tag the 200-day EMA and then succumb to a lack of follow through at this key resistance level.



Further evidence of how the 200-day EMA is proving to be a powerful attractor and hurdle that the equity indices are having to confront is provided by the chart for the S&P 500 (^SPC) where consecutive spinning top/doji candlesticks are straddling the 200-day EMA. The pattern underlines the fact that traders are indecisive about the near-term direction because of the anxieties and uncertainties that are so prevalent in the credit markets.



The UK’s FTSE (^FTSE) put in a good showing yesterday as it erased a lot of the losses from Friday’s almost four percent decline. The chart reveals that the 6000 level is a key level of support for this index which held in March and which will be widely tracked by traders for any evidence that this time things could be different. Benign inflation data that was released on Tuesday morning has given the index a further lift but there is still the sense that this all rallies have to be treated with caution as they may simply provide troubled hedge funds with better prices to liquidate some holdings as well as aggressive short players to further scare the large institutional long only funds.



TRADE OPPORTUNITIES/SETUPS FOR TUESDAY AUGUST 14, 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.

Overseas Shipholding Group (OSG) was one of the many stocks that sold off hard in last Thursday's liquidations by many hedge funds, including those that were disclosed by Goldman Sachs in yesterday's conference call. As discussed here in Friday's commentary the 200-day EMA provided a platform for a recovery rally and the stock moved up by almost eight percent.



A related stock to OSG has some positive divergences with a constructive looking price pattern.



Wynn Resorts (WYNN) appears to be in the process of forming a bull flag.



Sara Lee (SLE) looks to have been another prominent victim of the liquidations performed by several "quant" hedge funds last week and also has mounted an abrupt recovery. The pattern highlighted fits exactly the definitions of a Morning Star candlestick formation. There is however considerable overhead resistance not too far above yesterday's close.



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.