On the surface, yesterday's rally in the blue chips looked quite impressive with gains of one percent for the DJIA and 0.8% for the S&P 500. Beneath the surface though there are grounds for a more cautious posture. Volume for the last three up days in the SPY proxy has been below the 15 day moving average, whereas the sessions when the index has sold off are registering above average volume. Also it was noticeable yesterday that the Nasdaq Composite and the smaller caps failed to enjoy the same burst of energy, registering gains of just 0.3% in both cases.

The chart below for the S&P 500 cash index (^SPC) shows that the three most recent spikes upwards have topped out at successively lower levels and there are increasing signs that a number of major stocks, in particular some of the big technology names, may have reached momentum peaks in the near term.



The Russell 2000 (^RUT) recorded a spinning top candlestick yesterday and as already noted it lacked the dynamism of the larger cap indices. The possibility exists of a growing dissonance between the stocks that are often "gamed" by large index players and the broad majority of stocks that are not so widely used in systematic trading strategies.



The UK’s FTSE enjoyed a good run-up yesterday and peeked above the 200-day EMA but also notably topped out with an intraday high below that recorded on Setpember 4th. The index is suffering in this morning’s trading in London largely as a result of the highly unusual steps taken by the Bank of England to provide emergency funding for the UK’s fifth largest mortgage lender, Northern Rock. It turns out that Northern Rock’s very aggressive expansion over the last two years, coupled with the freezing up of the inter-bank lending market, has caused the bank’s management to turn to the lender of last resort for a large injection of medium term funding.

Whether or not more institutions will need to be baled out is of course on trader’s minds and contributing to another nervous session with spillover possibilities.



Monday's recommendation regarding MacDonald's (MCD) produced an immediately satisfying result but this was followed up yesterday, somewhat to my surprise, with an encore performance as the stock gained another six percent on very heavy volume.



Flextronics (FLEX) is forming a pennant formation following its recent break above the trading range and should see further upward continuation in coming sessions.



I noted above that some of the tech stocks are showing evidence of fading momentum and this is exemplified in the chart for IBM. The chart formation does not yet provide grounds for a very confident short position but it would not be surprising to see the stock retest the 50-day EMA which sits at $112.



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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