The S&P 500 continued to probe the area above 1300 yesterday and completed the day with a small gain of 0.2%, retreating to 1305 after reaching an intraday high of 1310. A Shooting star candlestick was formed and the index may be extended in the short term and need to consolidate its recent gains.

There were some other signs in yesterdayââ,¬â"¢s trading that the bullish activity so far this week could have brought many individual stocks to a point where they may also enter consolidation/correction patterns. In our daily scans we found a number of Evening Star and Shooting Star formations and we would suggest that this would not be a good time to be adding additional exposure on the long side. Although we often favor a contrarian stance, we also would be judicious in adding short exposure to the portfolio. At the moment our online portfolio is slightly bullish but contains a number of short positions that may be ripening.

As we discussed yesterday the Treasury market had become over extended as of last Fridayââ,¬â"¢ close in its anticipation of higher yields. The five year note yield touched 4.8% in Mondayââ,¬â"¢s trading but has since rallied strongly with yields moving down 21 basis points to finish at 4.59% yesterday. This has undoubtedly helped stocks this week but we may have seen the best of the rally already.

The Russell 2000 (^RUT) managed another all time closing high yesterday and closed at 743.79 which was slightly higher than Wednesdayââ,¬â"¢s close but the index chart also reveals a well defined Shooting star formation.

We continue to monitor the CBOE Volatility index (^VIX) closely and as we commented yesterday the marketââ,¬â"¢s view of implied volatility is untypically out of sync with the continued upward moves in the S&P 500.

It should be pointed out that there were several divergences yesterday with the Nasdaq Composite not participating in the rally continuation and in fact the Nasdaq 100 suffered almost a one percent setback. In view of the VIX divergences with the S&P 500 index and the divergences in the tech stocks we would suggest a cautious approach today as we may see increased volatility.

TRADE OPPORTUNITIES/SETUPS FOR FRIDAY MARCH 17, 2006

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.

CDNS  Cadence Design Systems 


Cadence Design Systems (CDNS) was one of many stocks to reveal an Evening Star formation yesterday and could be starting a correction.

CHRW  C.H. Robinson Worldwide Inc 

CHRW has a very similar chart to the one we just reviewed for Cadence Design.

JDSU  JDS Uniphase Corporation 

JDSU has a very striking Shooting star formation and the money flow is fading.

LPX  Louisiana-Pacific Corporation 

Louisian Pacific (LPX) has had a very good recovery rally since it sold off on March 8th but it may be approaching the top of its ascending channel.

TLAB  Tellabs Inc. 

TLAB has been in the online portfolio for several days on the short side and may be ready to deliver.

KG  King Pharmaceuticals 

King Pharmaceuticals (KG) was a recent short recommendation that breached our stop loss level and we suspect that the overall bullish market activity may have postponed the resumption of further selling.

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 guarante of future results.  Trading stocks and CFDââ,¬â"¢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 you cannot afford to lose. This article is neither a solicitation nor an offer to buy or sell securities.

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.