For market watchers glued to their screens yesterday the action at times was even more gripping than the best that Hollywood has to offer including the excellent Bourne Ultimatum . The wild session on massive volume powerfully illustrated the vicious nature of short squeezes in the context of extreme intraday volatility. As the index players were busily testing (and re-testing!) key support levels on the S&P 500 close to the March intraday lows there were clear signs that some canny traders were preparing the ground for a major rally and short squeeze in some oversold financial stocks.

Watching my screen around midday New York time yesterday there was a clear dissonance between what looked like a probable S&P breakdown below the 1370-80 level but at the same time significant buying taking place in some of the banks and other financial stocks. Mentioned here yesterday as likely candidates for a bounce, Citigroup (C) and especially Bank of America (BAC) were building nicely during the peak selling in the index futures. The ensuing short squeeze and index recovery was largely powered by strong moves across the banking sector with some standout performances form Bear Stearns (BSC), Washington Mutual (WM), Fannie Mae (FNM), JPMorgan (JPM) and Wells Fargo (WFC).

The follow up to yesterday's discussion regarding the importance of the 200-day EMA for the DJIA shows how the index heroically managed to recover from a more than 300 point drop intraday but came to rest almost exactly at the level from Wednesday in the immediate neighborhood of the 200-day EMA.



The Nasdaq 100 (^NDX) also closed almost exactly at its 200 day EMA again after a massive intraday excursion.



The banking index was one of the best performers in yesterday’s dramatic session. The rally could have some way to go and, as a more rational analysis and diffentiation of the strands of the financial sector and their exposure to the securitized debt obligations problem continues, I would suspect that the focus of worry will begin to move away from the mainstream banks towards the unregulated financial intermediaries which have far greater capacity for delivering nasty surprises.



So many tumultuous developments were part of yesterday's global panic stricken trading session. Commodities sold off, precious metals plummetted, the yen surged, short term Treasury rates moved down below four percent and the VIX spiked up to touch 37.5 which is an extreme reading. Those were just some of the day's highlights. In addition, the US's largest mortgage lender, CFC, after announcing that it had called on an $11 billion emergencey credit facility saw a further large drop (but which in line with the market's recovery was less severe on the close than it had been at the peak of yesterday's panic selling).

Alas the Asian markets do not appear to have been heartened by the late recovery in the US markets. The Nikkei 225 (^N225) produced one of its worst sessions as it continued down another 5 per cent plus. An aggravating factor for this market is the dramatic rise in the yen against all currencies as massive redemptions are forcing hedge funds to abandon the carry trade. The Hang Seng as this is being written is also down by more than 4% and particular focus today will be on the European markets and in particular the FTSE which dropped more than four percent taking out the key 6000 level.



TRADE OPPORTUNITIES/SETUPS FOR FRIDAY AUGUST 17, 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.

Bank of America (BAC) may further benefit from the switch in sentiment regarding the banks but as mentioned yesterday the rallies could prove short lived as short sellers will want to test the down side again soon.



Bear Stearns (BSC) was one of the principal actors that helped the genie to escape from the bottle and reveal the opacity of certain credit market derivatives. Yesterday's powerful, short squeeze induced rally, was not however accompanied with the kind of volume that one would have expected from a 13% rise. The notion that major investment banking stocks could be trading like small cap tech stocks captures the spirit of the current market environment.



The chart for Wells Fargo (WFC) again reveals the powerful surge amongst some of the banks but there may be limited chart capacity for further progress.



It was hard to select the most interesting from such an array of possibilities. The final chart is for Pan American Silver (PAAS), which saw one of the largest declines yesterday and taken in conjunction with a big drop in the price of gold must raise real questions about the traditional safe haven notions that are claimed for the precious metals.



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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