The selling persisted yesterday amidst new concerns about the integrity of the financial system which seem to be arising with the passing of each day. The focus chart for today is for the Dow Jones Industrials (^DJI) which is one of the last of the major indices to come down to its 200-day EMA. A lot of attention was paid to the fact that the index broke below 13000 in yesterday’s trading, but from a technical point of view a lot more attention should be paid later today if the index breaks decisively below the 200 day EMA which lies uncannily close to yesterday’s close.



The S&P 500 (^SPC) tried to rally but once again succumbed to further attrition as the session wore on. A test of the 1380 level seems to be in the cards in coming sessions and when this is approached, the reaction of trading desks will provide a useful insight into the intermediate term technical outlook for equities.



As investors continue to flee the financial services sector, there has been some campaigning by institutional analysts that the next sector that should provide leadership, once we get through the current turmoil, will be big name technology stocks. Some of the charts in the semiconductor sector have some of the more constructive patterns but there are others that are breaking down. IGW, one of the ETF’s in the sector, has also now joined almost all major sectors in breaking below the 200-day EMA. 



Overseas markets in Asia and Europe have followed the US down in Thursday’s trading. The Nikkei 225 (^N225) fell below 16,000 in Thursday’s trading but managed to recover some of its poise into the close and contain its losses at two percent. In the UK the FTSE is trading below 6000 as this is being written, and this is not only a psychologically significant level but also an area of strong chart support/resistance.

Among the other cross currents that are swaying markets and are themselves a reflection of hedge fund dynamics, the yen carry trade is clearly being vigorously unwound with pronounced falls in several high yielding currencies and associated strength in the yen. The sterling/yen cross rate has dropped from 250 back to 230 during the last month.

The chart below is an index that we rarely feature, but the seven percent drop in the KOSPI index for South Korea shows that the contagion appears to be spreading to markets that are not so obviously exposed to dislocations in the financial sector but which are likely to reflect a phase shift in global liquidity conditions. 

 

TRADE OPPORTUNITIES/SETUPS FOR THURSDAY AUGUST 16, 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.

Is it time to start buying some of the beaten up banking stocks? The topic is being widely discussed and obviously opinions are all over the map but with many suggesting that better opportunities will present themselves and that there is no need to be in a hurry. While that sounds sensible the markets rarely behave as the conventional wisdom would suggest.

Some of the charts for the money center banks appear to be reaching levels where there is some evidence that the selling momentum has peaked and where some accumulation may be appearing. Citigroup (C) has some positive divergences and yesterday’s doji candlestick may be signifying an inflection point.

I would, however, not expect these stocks to turn on a dime and any rallies could prove short lived.



Another graphical depiction of a possible long opportuntity in the banking sector is to be seen in the chart for Bank Of America (BAC). What can be said about this chart is that it is one of the least bearish looking formations in the US financial sector. 

 

The investment banks have come down very heavily since mid July and one of the leaders to the downside has been Lehman Brothers (LEH). The long term weekly chart below shows that the stock is now in the proximity of a key trendline that runs through the weekly lows extending back to the March 2003 bottom.



Countrywide Financial (CFC) plunged by thirteen percent yesterday as doubts were raised about the company’s future viability amidst the turmoil in the mortgage and commercial paper market. If this company is genuinely at risk of having to seek protection then the housing woes may have a lot further to go. This was also reflected in the performance of the homebuilders that are still in free fall. Beazer Homes (BZH) closed at $10.48 yesterday and this is a stock that was trading above $80 in early 2006.



Wynn Resorts (WYNN) still has the essential characteristics of a bull flag formation that I touched on in Monday’s commentary and the stock has stood up well during this week’s sell-off.



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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