ShadowTrader Focus Report_2008

How can a trendline be a lagging indicator.

If the slope of the line is down, the trend is down. As long as price trades under the line, the trend is down. Once price closes some bar above the line, the trend is broken. How is that lagging in any environment?

Moreover, my commentary as of late has basically been saying that nothing is working in "this type of market". There is essentially no trend because even though the primary trend is still down, within that trend there are so many violent reversals in either direction that it almost renders the trend meaningless.
 
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Good Morning, Traders. We have now closed an hourly bar down below the 61.80 Fibonacci retracement level from low to high of the November 13th, move. The chart is below.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081118SPY.gif">

Whenvever you have a close below the 61.8 level, the odds are pretty strong that the pullback is not a pullback at all, but rather a full fledged retracement back down to the starting point. The starting point is annotated at the lows by the green circle. The market should move to here, now. In fits and starts more than likely, but should end up there sometime this week, if not today.

The purple line which represents a new downtrend on the hourly will be resistant if we gap up today. Keep an eye on this area as sellers should be active there. Remember, the easiest "gap fill play" is always whenever you open at an area of prior or trendline resistance.

Another technical area that you will want to <B>pay attention to today is the 865-875 $SPX range.</b> If you were watching the markets yesterday, you probably saw the very vicious chopping action that occurred between this range from approximately 1:30pm EST to 3:30pm EST. As straight line moves (areas of no chop) do not act as support or resistance, be aware that areas of congestion do the opposite.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081118SPY2.gif">

The congestion area is circled in green above. Note the ascending trendline as well whose terminus is right up against the low end of the range. Watch that SPY 87.00 area closely today for possible short entries. Bias is more bearish than bullish now.
 
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Good Morning, Traders. By popular demand, we posted Peter's new video <i>How to set up market internals on TOS </i><a href="http://shadowtrader.net/educationArchive.html">here.</a> For those of you headed to Las Vegas for the Traders Expo, he will be doing a free workshop on how to interpret these signals. For those of you not attending, yesterday's price action had an intersting pivot that should point the way a bit as far as how to interpret these signals.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081119SPY.gif">

The first chart of the day is a basic <b>SPY</b> 2 day 15minute. The <b>bread & butta</b> as we sometimes call it. We have circled the double top that happened at 10:30am (Note the timing, reversal period). What we want to do here is look at market internals (aka, under the hood) and see if there was anything out there that would have told us NOT to buy this breakout, and actually "fade" the move. Note that the 10:15-10:30 bar (second white circled area) has a nice sized body showing emotion on the part of the bulls as the market screams up to retest a prior intraday high. You can be sure that many traders are feeling very bullish at the close of this bar and are holding longs thinking the pullback will be shallow from here.

But its not, is it? No, in fact the market falls apart almost immediately and moves much lower, taking out the morning lows in the process. Although the ShadowTrader Method &copy; uses a combination of Breadth, Advance/Decline Line, and NYSE Ticks to get intraday readings on the market, oftentimes the divergence signal happens in only one of the three. Let's look at what the NYSE advance/decline line was doing at the exact moment that we were retesting that prior intraday high.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081119ADV.gif">

On the chart above we have circled the two intraday tops in the A/D line which correspond with the same levels in the <b>SPY</b> above. Both charts are intraday 15minute charts. We've also circled the actual absolute number of advancers vs decliners on the right edge of the chart as well. The divergence here should jump out at you immdediately. Obviously the second circle is lower. What this means is that price in the S&P is testing a prior high but at the exact same moment, the number of stocks advancing versus declining on the NYSE is actually much lower. Moreover, as this is happening, the A/D line is still not getting positive at all, but only bouncing to -200 on the second test. If a market is to break out to new intraday highs, then it has to do so on at least equal or preferably better market internals than it was exhibiting the last time that price tested that level.

Peter will be speaking on this subject this coming Friday on the Main stage at the <i>Las Vegas Trader's Expo</i> at 3:15pm. We hope to see you there.
 
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Good Morning, Traders. We're going lower.
<Br><Br>
<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081120DOW.gif">

That's a daily of the Dow. The pattern is called "descending triangle". It means that the base of the triangle is defined by points that are roughly equal and the hypotenuse is created when the market bounces to lower highs each time. Now that we've tested the base multiple times it should break, possibly today.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081120DOW2.gif">

We've run the above chart before. After yesterday's beating its worth a look once again as the circled areas are coming very close now. The market is just too close now not to test these areas. To recap, they are:

July 2002 - low of 7532.66<br>
October 2002 - low of 7197.49<br>
March 2003 - low of 7416.64

The market is easily short until at least the first of the three levels which would be roughly <b>Dow 7500</b>.
 
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Good Morning, Traders. Yesterday's <i>Focus Report</i> listed the three key technical supports on the Dow from summer 2002 to spring of 2003. Yesterday's selling parked the Dow about 20 points above the first level (July '02), with an intraday low of 7506.97. So point one has been breached. Since the market closed at the lows on a big body candle, we must assume that it's not yet over in the short term. Although there was some sign of reversal in late morning, the bearish close is indicative of further downside at least in today's morning session. Our thought here is that if that first technical pivot was going to hold, there should not have been a bearish close on the lows. Seeing buyers step in early in the session and then get beaten back down only confirms this.

Very often, when markets test lows they are not perfectly in sync with each other. The majors (Dow, Nasdaq, S&P) are rarely hitting prior swing lows or swing highs at the same time. This is because there is always some relative strength or weakness in one that puts it either ahead or behind the others. We feel that this presents an excellent opportunity as the majority of traders mistakenly short the weakest of the group as its breaking support, not realizing that at the same time the strongest has yet to test its prior support. So what happens is that the index that is shorted breaks down only marginally and rallies right back up through the traders entry as the stronger index comes down to support and attracts buyers. This is the scenario that we feel is about to happen in the <b>Dow, Nasdaq, & S&P</b> and will create an opportunity for a long trade. Let's look at the monthlies of all three to see where each is in relation to those '02 - '03 lows and how we can profit from this divergence.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081121SPX.gif">

Clearly the weakest of the three. All three of the '02-'03 support points have been violated. This is what some traders refer to as the "overshoot" or "undercut". Many people are holding this short right now and thinking that its going straight to Hades. Maybe, maybe not. Please continue, gentle reader. <Br><Br>
<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081121DOW.gif">

We'll call this one the middle of the pack. Only the first level has been breached (July '02) while October '02 and March '03 are still below us.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081121COMPQ.gif">

And this one is the one we think will be the spoiler. Note that relative strength in tech has this index well above all three prongs of that swing support. The idea here is going to be that almost everybody is going to focus on the S&P and Dow breaking down below those key supports, short them, and not notice that the Nasdaq is going to be right at its prior support. The tech issues testing their support while the others are below it will act as a drag on the other bears and spoil their party. Whenever the other indices are crashing below prior supports, that is the most optimum time for this type of "spoiler" scenario to occur and create the <i>overshoot</i> or <i>undercut</i> scenario described above where the Dow and S&P go down below those key levels for only a short time and then rally back upwards very hard as seller in the Nasdaq all dry up at once.

Bottom line: Set an alert for Nasdaq Composite as it comes down into the range of 1180.26 to 1108.49. Once the Nasdaq enters into this range, be very nimble and ready on the buy button. We will be watching carefully and will be looking at various longs including the broad market ETF's. <b>QQQQ</b> would be the most obvious one but there will be others. We'll continue to update the market's progress towards this level in further <i>Focus Reports</i>. Or it could happen today. Would require quite a meltdown, but of course anything is possible in a <b>$VIX 80</b> environment. Be ready, it all happens in a flash these days.
 
Thanks to everyone who came out to our booth this past week at the Las Vegas Traders Expo.

This weeks video:

-A nice shorting area ahead in the S&P

-Utilities holding up very well and could be in play soon

- Some swing plays in Adult Education stocks

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enjoy......
ShadowTrader

:)
 
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Good Morning, Traders. Friday's options expiry turned into a wild & wooly close which often happens on that particular day. This left us with a nice pattern setup on the daily broad market charts that will be helpful to us this week. Let's see....

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081124SPY.gif">

Whenever an index or stock breaks down below a horizontal support as it has in the chart above, there is almost always a short setup happening as the backside of the support level is retested from the bottom. In this particular case, the test of the underside of that horizontal support (now resistance), is coinciding perfectly with our downtrend (the diagonal line created by all recent highs). The market should move up today into the circled area which will then be a nice shorting opportunity because there will be a very defined stop area.
 
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Good Morning, Traders. For those of you who attended Peter's free seminar on market internals at the recent Las Vegas Traders Expo, you can consider today's commentary to be a "Part II", subtitled <B>"Breadth is King, period".</b>

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081124SPY.gif">

The chart above is the same one we ran in this space yesterday, just as a reminder of the pivot we were looking at in yesterday's <i>Model Portfolio</i>, <b>SPY</b> short. The short was called at the $84.00 level with a $2.50 stop that got taken out the same day on the afternoon rise. Let's look at an intraday <B>SPY</b> chart to see the entry and then a peek at internals so we can see the setup at the time of entry and then put the <b>hindsight glasses</b> on to see if we could have done anything differently.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081125SPY.gif">

The second chart is the <b>SPY</b> intraday showing where we got into the trade short at the white circled area. Again, on this intraday chart it would look like we are just picking at top, but in reality we know that the broad market is pushing up against the aforementioned pivot at the prior lows at this point.

At this point we are looking for something internally that is signalling that as the market pushes up into resistance, something is not hitting on all cylinders. We found that confirmation in the <b>NYSE $TICK</b>.
<Br><Br>
<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081125TICK.gif">

Note how the <b>$TICK</b> has already begun to roll over long before the market does. Our <B>SPY</b> short entry happens at 12:14pm. Yet look at where the ticks have started making loower highs, at least 45 minutes prior to that. If you match up the above chart with the <B>SPY</b> chart you can see clearly that the market is still making higher highs when the ticks are making lower highs.

So, why didn't it work out? The trade went in our favor for a little while, then rallied back to entry and flew right up into a negative situation rather quickly, resulting in a same-day stop out. One reason may have been the breadth. Chart please....

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081125BREADTH.gif">

The breadth is "king", the A/D line is the "queen" and the $TICKs are the "prince" in the hierarchy. Note how in the breadth chart above, the breadth <i>does</i> make higher highs between 11:15am - 12:00pm EST. This moving in sync with the markets of the breadth is confirmation that the market is strong under the hood.

So again, why did we do it? Well, for one thing its <I>very</i> common for one of the three internal indicators to lead the other two. It's not necessary at all that all three begin to diverge ahead of the market in order to signal a reversal. Secondly, although the breadth is king and in hindsight probably should have been given more weight, we have all been spectators to a market that has reversed back down to intraday lows at the first sign of weakness for months on end now. That being said, knowing that we were up against technical resistance of those prior lows anyways, getting the signal from the <b>$TICK</b> only was worth the shot. Note that we chose to stop her tight which was smart. Small price to pay for getting the market to tip its hand as to what its further personality may be. Now that we got stopped out of this trade, our job is to remember it and realize thar for the first time in awhile, a negative internal divergence and a prior low didn't stop an intraday bull run. This is of note. We <i>might</i> be seeing some firming here.
Let's continue to take it day by day.
 
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Good Morning, Traders. Market still holding up quite well and closing right at the downtrendline on the <B>SPY</b> for the second day in a row after trading up and down and closing flat. Although we have to construe this as minorly bullish for now as the bears have not stepped up immediately as they have been doing lately to beat indices back down, we must also keep in mind that we are still in a bear market and as such must be aware of the types of plays we are going to use when trading stocks overnight.

Given the environment, and a market that is up a few days in a row here, we thought it would be a good time to revisit the old "counter-trend" trade. Those of you who have been with us for awhile know this is a high probability setup when executed properly. In a nutshell, its simply shorting a stock up against a proven resistance level or buying a stock as it touches down to a proven support level. Generally, you want these levels to be <b>major instead of minor</b>. You can think of a major pivot as an area where the stock moved off of and either stayed lower or higher than that area for some protracted period of time, generally measured in weeks.

One of the other keys to the strategy that can increase your odds is to get into a sector that is also stalling at some prior high or coming down into some prior low. To that end, we think there may be something brewing in the refining/drilling stocks as defined by <b>$XOI</b>


<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081126XOI.gif">

Note how much congestion there is just in the sector in general (ie: it's not known to trade along straight lines, but rather to bounce around in a range). That's one factor right off the bat that makes the sector attractive for a counter-trend move. The other is that there is obvious resistance at the circled area. Some names to investigate for short entries over the next few trading sessions would be <b>XOM, CVX, COP, MRO, APA, HES, & BP</b>

The heads up on the <B>adult education sector</b> in this weekend's <i>ShadowTrader Video Weekly</i> was spot on. Hopefully some of you are participating. For now they look long and strong, we'll watch the nature of the pullback to see if any exit is necessary at all. A good play is to take off partial size into strength and then watch the nature of the pullback carefully to see if its just a reaction that signals a pause or rest in the stock or a full blown correction.
 
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Good Morning, Traders. Stealth rally in the markets on Wednesday has taken us right up to declining 20 period daily moving averages on all the majors. If Tuesday's doji couldn't be considered a <i>confirmed close</i> above the trendline, Wednesday's good size body is definitely a signal that the November downtrend is broken for now and we have a shot at breaking out over the 20ma and possibly moving to the 50. Everything is annotated below.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081128SPX.gif">

As is the case in most bear markets, as soon as you break one trendline, you often have another one staring you right in the face soon after. That is the scenario today as we have pushed up against the 20ma which is also a trendline resistance, at the red circled area.

What is definitely to be noted here is that over the course of this past week, the prior lows in the <b>$SPX at the 840 area</b> (yellow circles), did not create any meaningful resistance as they were tested from the downside. We have to construe this as bullish and also perhaps be looking to be buyers of strong stocks and the market on any weakness back down to this area. The perfect scenario (as always) would be a gentle backing off from this 20ma/trendline resistance with no closes below <b>$SPX 800</b>, which would be the rest the market needs to make a run through this resistance area next week. If so we would have to assume shorts would be covering right on up to the <b>975 area</b> at that 50ma.

The markets will close early today at 1:00pm EST. Expect volume to be light.
 
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