ShadowTrader Focus Report_2008

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Good Morning, Traders. More of a pullback than expected which caused us to tighten up our stop on the <b>SPY</b> long trade which was our proxy for holding the whole market long. Although the pattern is not dead yet, we did expect a bounce at the gap fill area yesterday which did not occur. Let's have a gander at a picture.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081106SPY2.gif">

The snapshot above is hourly <b>SPY</b>. The circle labeled point one is the gap between 11/3 and 11/4. The low end of this area should have held the bears at bay but did not. Remember what we said in last week's <i>ShadowTrader Video Weekly</i> about trades or scenarios that don't work out as expected? We used the failure to follow through on the <b>ABC</b> short trade as confirmation that the tide had turned in the other direction and that the sellers could be done for the time being. Well, now we are seeing a move in the other direction that is also a wake-up call. In yesterday's <i>Focus Report</i> we said we would be looking to buy pullbacks when that circled area was hit. As internals were horribly in favor of the bears yesterday and the pivot did not hold, the market is sending us a message that this 950-1000 area in the S&P could be a bit messier than expected and will not stay high and tight before moving higher. We are going to use the 20ma daily now in the <b>SPY</b> as our next 'line in the sand' which needs to hold if we are going to stay bullish. A chart is below.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081106SPY.gif">

The green line leading into the green circle needs to hold and not be closed below on any daily bar if investors are going to remain confident. It took us a long time to trade back above this level so let's try and hold it! We remain cautiously bullish and on the lookout for stronger stocks on pullbacks, with the caveat that any continued acceleration of selling will make us change our mind in a New York minute.
 
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(sent out to subscribers at 11pm last night). we usually put out 2-5 ideas per day like this for the NEXT day's trade.


bullsbears.GIF
 
The full version of this report with daily stock picks and real-time email alerts is available here for $20 per month

Good Morning, Traders. In yesterday's report we mentioned that we wanted to see the market hold the 20ma daily on the S&P in order to maintain some confidence amongst investors that we were not going to retest the lows. That of course went out the window yesterday as the bears pillaged the market and we closed well underneath that key technical level.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081107SPX.gif">

The green line above is the aforementioned 20 ma. Given the market's weakness right now, we felt it was important to note that the prior lows that we seem to be careening towards, would be a third test. It's a basic tenet of technical analysis that whenever a support or resistance level is tested, each subsequent test weakens that support or resistance. A simpler way of thinking of it is that double bottoms are common but triple bottoms far less so. A knock on door number 3 will probably send us another leg lower to those '02-'03 lows. Any bounce off of that area will probably be a good area to enter new shorts.
 
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Good Morning, Traders. As the markets bounced a bit on Friday, many traders are asking themselves which direction the next move should be. As there is no perfect crystal ball that will give us a guaranteed answer we must use the tools at hand to characterize the preceding move downward (Wednesday & Thursday), and the subsequent counter-move, which would be Friday.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081110SPY.gif">

The chart above confirms that the market is in a no man's land, where recent selling has retraced exactly 61.8% of the up move that was from lows of October 28th to highs of November 4th & 5th, and then on Friday's lift, has moved up a bit higher, closer to halfway between these swing highs and swing lows. In a nutshell, there are three moves here that we want to look at. One being the up swing from late October, the second being the pullback of the middle of last week, and the third being Friday's bounce. Although there are many ways to "characterize" moves, meaning to look at what was happening internally (aka, Under the Hood) against price action, one of the most simplest and most important is overall volume. Volume is the engine that keeps a market moving in a certain direction. When simple divergences occur between volume and price, it makes the move suspect and prone to reversal.


<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081110VOLUME.gif">

In the chart above which breaks down total volume on the <b>NYSE</b> into hourly bars, we have annotated some of the days from the recent three moves. You'll note that there are some key volume divergences on a number of the days. 11/03 and 11/04 were the last days that the market was moving up before the decline of Wednesday and Thursday of last week. 11/3 was a weak volume day where the market just made a doji. 11/4 was the swing high of that move, yet there was relatively average volume that day, nothing indicative of price that wants to sustain itself. The next two days are notable as volume surged higher on Thursday's selling, but then retreated on Friday when the market attempted a counter-move.

For now the volume pattern seems bearish and the market is showing signs of wanting to retest October lows. We put a green circle under the lows of big body candle (first chart, above) that was the last hour of trade on Friday. If the <b>SPY</b> moves into that area today, expect sellers to get more aggressive as it would be a confirmation of recent volume divergence, a violation of the lows of a big body up candle, and a failure by the bulls to defend that 61.80% Fibonacci level.
 
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Good Morning, Traders. Market continues to act downright weird as news seems to be trumping technicals at every turn. Yesterday was a classic gap down below an area of supply that had sellers (including us) just salivating for a return to October lows. The morning was so bearish that it looked like we were going to get it in one day. Although the news at 1pm surged the market upward, sellers took back the gains almost immediately, which tells us that the pattern downward continues to be intact. We don't expect the streak of dark cloud cover tops to be broken here, although in this market anything can happen!

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081112SPX.gif">

We remain short biased and are looking for the S&P to retest the lows in the 850 area and the Dow to about 8,000 as well. As mentioned earlier, this would be a third test of this area which is bearish in the bigger picture.

Our long call on the dollar seems to be dead on as the <b>UUP</b> surged yesterday. It should test swing highs soon at the same time as crude is touching down to a long term support. We expect a playable bounce in <b>USO</b>, or <b>OIL</b> soon. Be on the lookout for that.
 
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Good Morning, Traders. <Br><Br><B>Premature Exitation</b> - <i>pre - ma - ture - ex - i - ta - tion</i> [noun] 1. The act of exiting a market position too soon, before it has time to play out to its full potential.

As we go to press here, Peter is curled up in a ball on the linoleum floor with a bottle of single-malt. No wait, that's that other guy who throws the chairs. Peter is the one shooting Stolichnaya with one hand while opening up the the number 10 size tin can of whoopass on himself with the other!

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081113AAPL2.gif">

Above is a chart showing our recent short play in <b>AAPL</b>. As we made a bit of a blunder covering this yesterday, we felt it would be a good educational lesson for us all to go over the trade together.

We shorted the stock on Monday at the green circle. On Tuesday, not much happened so we stood firm. So far so good. Then on Wednesday, we tightened our stop just over the high of the day and got our stop run very quickly and left the arena with a small profit, nowhere near our target of $86.00. At the time of the tightening of the stop, Apple was showing a lot of relative strength. The market was tanking hard and yet <b>AAPL</b> refused to test its lows. So the stop was tightened just over the high of the day and was promptly run. There were multiple mistakes here that we can all learn from.

1. The blue circle in the chart above is the ONLY area for a stop on this swing. Note that in that area the trade would have been a scratch at best. This would be the area to tighten a stop to.
2. The stop was put less than .10 cents above the high of the day. Way too small of an amount for a stock of this beta.

3. Even though <B>AAPL</b> was acting squirrely, the broad market did not reverse in any way to move up to the highs of the day to fill its own gap. IF the market had done that, then maybe the action would have been justified. While the tide is in your favor, give stocks more leeway.


What happens in market environments like this when you see huge reversals of trend almost daily, is that you begin to assume that that is the M.O. of the market every day. Put another way, your trust in trends and momentum working itself out to targets begins to wane. While being nimble according to the current personality of the market is a good way to be, the <b>AAPL</b> trade shows that you can take it too far.
 
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Good Morning, Traders. After thinking we covered <b>AAPL</b> too early (which we did), the market responded off of just below swing lows with a 900 point Dow run that took Apple and most other stocks well over areas of recent breakdown. The <b>UUP</b> collapsed as we expected off of the highs and took <b>GLD</b> screaming higher, so all in all except for the Apple debacle we came out well and are now in cash. Question is, after yesterday's advance, what the heck to do with it?

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081114DOW.gif">

Whenever you have a huge thrust agaist the prevailing trend, its always good to draw longer and shorter term trendlines on your daily chart to put everything into the proper perspective. As we can see in the snapshot above, the <b>Dow</b> did manage to close above the tertiary trendline (3) and thus break at least the shortest term trend to the upside. So after some chop around, we should now expect that the line of least resistance is up in the Dow until approximately 9,000 whereupon it will hit its head on trendline number two.

We will be biased long now between here and there, expecting buyers to step in on any pullback from yesterday's run. Waiting for confirmation, or the right mix of market internals on the reaction, will be paramount to your success. Besides the trendlines, do look at prior instances over the last few months where there were enormous big body candles to the upside and note that they did not always follow through to new swing highs. Will this one be a repeat of <B>October 28 or October 13?</b> Tread lightly. The trendlines above show you that you haven't missed anything yet.
 
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enjoy,
shadow
 
The full version of this report with daily stock picks and real-time email alerts is available here for $20 per month

Good Morning, Traders. When the market acts as it did over the last two days of last week, there isn't a heck of a lot to say technically since things are basically little changed. The market continues to wreak havoc on anyone with a time horizon for their trades of longer than one hour.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081117DOW.gif">

We decided to run the same chart from Friday's edition, that being the Dow with the three trendlines on it. Just to show that although Thursday's action closed us above the third line, the late day selling on Friday took us right back underneath. Essentially, nothing is doing here. Volatility continues to rule the day and there is very little direction out there.

While we have not been killing it as of late with any large winners in the <i>Model Portfolio</i>, we hope that our subscribers realize that we are not losing any money and more importantly that our trading style has changed with the times. It's just not the time to be able to get into a strong pattern and look to hold it for a week or more. People are getting killed in this market because they have failed to adapt. They are either still trading in the same style as they were a year ago, or they are trying to get fully invested (long) at every single sign of a bottom. This is what is causing a lot of the push-pull up and down as there is simply not enough conviction amongst a large enough group of players to prop the market up and begin some meaningful trend.

As we've said before, our weekend scan of stocks and sectors <B>(from $BANK to $XTC and anything over $20 & trading 500k shares a day or more)</b> continues to be the best barometer of the market as a whole. We already completed this scan as we go to press here and we can honestly say that it has turned up <i>nothing</i>. What is often as many as 30+ names in either the bull and/or bear column is now turning up 3-5 on either side. 99% of patterns are <i>candles lining up same size bodies</i> on both dailies and weeklies. We repeat, tread lightly.
 
His info seems fine for trend trading and following the current momentum with trendlines and such...

However, I think this type of info is missing the current environment's characteristics of a severely oversold market and the inherent mean reversion probabilities. We can wait for moving averages and trendlines to be penetrated to the upside (and meanwhile keep calling this a downtrend) but that is a considerably lagging indicator at best in this kind of market.

Mean reversion in a critically overbought or oversold market is a much more powerful force than the "primary trend" ie the direction of the prior move that got us into this overextended place. Suggest you tune back in here when we go back to normal trending markets.... where this sort of market following makes sense.
 
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