With stocks rallying rather sharply yesterday 08/05/08, posting their biggest one day gain in four months, the convincing manner in which stocks moved yesterday could turn out to be a bear trap that’s ensnared investors who got in yesterday afternoon, after they saw stocks hold on and tack on to early gains.

Since May 1st of this year and including yesterday’s rally, there have been eleven days in which the Dow Jones Industrial Average climbed at least 100 points. But for July 16th, when stocks climbed 277 points, and then followed through the next day with a 208 point rally, stocks have given up those triple digit one day gains within the following seven trading days.

Note: stocks gained 186 points on July 30th and we have not given those gains back yet because of yesterday’s rally, plus there is not enough data (trading days) to see if the same would apply.

Financials were big gainers yesterday, with Wachovia (WB) up $1.95 to $19.06, Citigroup (C) up $1.09 to $19.92, AIG (AIG) up $3.20 to $29.89, Wells Fargo up $1.36 to $31.54, Lehman Brothers (LEH) up $2.30 to to 20.24 and Merrill Lynch (MER) up $1.83 to $28.22.

These moves present clear near term shorting opportunities and traders should closely watch these stocks. As soon as the rally mode fizzles, short these stocks. If Lehman Brothers (LEH) stock starts giving back from here, a move to just $18 would be a 10% gain for traders shorting the stock!

On July 14, Lehman Brothers (LEH) was trading at $12.40. Financial stocks rallied from there and on July 18th, LEH was at $19.11. The stock fell to $18.32 by the 21st and then rallied again to $21.10 on the 23rd. It was then downhill from there, with the stock back down to $15.27 by July 28th.

Fast moving traders using the current stock market volatility to their advantage, could see a substantial gain in their portfolio. With AIG down from the $60 range at the start of the year, it probably will end the year down, but one could trade the stock and realize at least a 20% plus gain by December.