ShadowTrader Focus Report_2008

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Good Morning, Traders. New day, new month, almost a new year. ....C'mon. Generally these pre holiday trading days are bullish and this year was no exception. The shortened session on Friday didn't do much but that's relatively important because it also means that it didn't fall down either. The general pattern of slamming buyers back down after bumps upward seems to be stalling at least for the moment.

As the best barometer for a market's health is always the scanning of large amounts of stocks and sectors to see how many bullish patterns are emerging, we would have to say that according to that temperature gauge, this market is waking up a bit. For the first time in awhile we are starting to see some strong names sitting up at tops of ranges and some breakouts from bases that are not failing miserably. The <B>continuing education sector</b> which we alerted subscribers to early on continues to outshine with names like <b>CECO, APOL, STRA</b> and others rising considerably.

Although we have to couch all bullish comments with reminders that its all in the context of a bear market, there are still flashes of signals out there that we could actually have a positive December. As evidenced by the charts below, we've had some strong breadth and a/d line readings during this run up which have not deteriorated at all

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081201BRE.gif">

Breadth has been quite positive over the last five days rally. Although we haven't pulled back at all yet, it's interesting to see this much positive breadth (above the white zero line) all at once. When the pullback inevitably does occur you want to watch this chart specifically to see how the readings below the zero line compare with these positive readings above. Just as strong? Stronger? Weaker? <b>$UVOL-$DVOL</b> is the ticker if you have not yet watched Peter's new video on how to set up market internals on TOS <a href="http://www.shadowtrader.net/videos/bonus_internals_08.html">here.</a>

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081201ADV.gif">

<b>Advancers minus Decliners ($ADVN-$DECN)</b>has been notably bullish as well with all positive closes and two nice closes above the plus 2,000 area which we denoted by the white pentagons simply to switch off of using circles for a minute and keep readers on their toes. Don't you feel oddly refreshed? We thought so. Note how any forays into the negative -1,000 territory which would be deemed bearish were rebuffed almost immediately (white rectangles).

Lastly, with all the bullish talk we ought to end on a bullish chart. Gold <b>(GLD)</b> looks like its making a comeback, breaking out from an ascending triangle to the upside a few days ago. Pretty self explanatory chart. If it comes into the green cirled area, buy some with a stop under those swing lows in the $72.50 area. Nice volume increase on the surge with declining volume since then.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081201GLD.gif">

On a scale of 1-10, the <b><i>bullishness of this market is a solid 6</b></i>. If the market can pull back into some higher low that holds then there should be a good number of setups to the long side in December. We are going to be watching the internals closely on the pullback and have begun to throw some stronger stocks into our shopping cart. Keep your eyes peeled to <i>Bulls & Bears</i> for the cream of the crop.
 
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Good Morning, Traders. As we discussed in yesterday's <i>Focus Report</i>, we were looking for the market to come in a bit on not too bad internals to confirm the recent bullishness and give some faith to those who initiated new positions that there could actually be some follow through. So far that has not happened as Monday's action in the broad markets created a trending day on NYSE breadth that was <b>80 to 1 negative</b> with the number of decliners beating advancers pegged to more than 2000 all day long.

What we are trying to do here is to keep your focus on market internals rather than on the absolute numbers that the clowns on TV talk about. Unfortunately, the numbers <i>Under the Hood</i> support the drubbing in the top-line figures, so the divergence that we were looking to get is not happening at all. We sold off hard, emotionally, and with sellers out in full force. The only bright spot out there was the fact that the overall volume in the markets did not come in very heavy at all, in fact, it was rather average and far below the amount of shares that traded on 11/21 and 11/24 which were the reversal and big up day respectively. This is probably not enough to hang the bullish cap on but its of note.

So, the bottom line is that although we don't really want to just abandon the search for the elusive higher low just yet, we must be objective and not ignore how bearish yesterday was as far as those market internals are. Let's visit with our old pal, S&P for a moment to check the technical picure.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081202SPX.gif">

Again, we're fully aware of how bearish yesterday was, that's why we didn't buy anytihng on a midday pullback yesterday because we stay focused on what the market is going to do in the near future and how that's going to impact our stock selection. The chart above is simply a representation of the pattern we need to see develop if this market is not going to break lower. While the Higher Low (HL), leading to a Higher High (HH) is still possible, the strong selling of day one of the pullback so far does not bode well for it to appear. The reason that we are staying with this line of commentary for now is that we know that the market will turn to the upside at the exact moment when the least amount of people expect it. At this same time, sentiment will be at its most bearish. Be ready. Tomorrow we'll visit with the chart of the <b>$VIX</b> which for now is showing positive divergence by not rallying as high when the market dropped to new lows. Let's watch closely to see what it does this time if we move lower today.

<i>Note: The overall volume percentages below in the Under the Hood section appear skewed due to the market closing at midday on Friday. </i>
 
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Good Morning, Traders. If you could please, tap into your memory banks and recall your emotional state at 1:30pm yesterday. Next, please recall how you felt sometime around 2:30pm, and also at the close. We can be sure that there was a wide range of emotion in most people. We bring up this little excercise to so that you can compare what you were feeling to what was happening <i>under the hood</i> inside the market at the time. Were they different? And in what way?

Let's look at the market first. Two day 15 minute <b>SPY</b>. What else?

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081203SPY.gif">

Above is the market. First thing you want to note is that there was no follow through to Monday's bearishness. In a nutshell, that means that the market never went lower than Monday's low and closed well off of Monday's low. Since the both the morning and afternoon reversals seems to come out of nowhere, lets see if there were any clues internally that could have tipped us off.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081203BRE.gif">

Look at the two circled areas on the <b>$UVOL-$DVOL</b> above. The market sells off right at the open yet this indicator is postive the whole time. At the afternoon reversal, the market comes close to the lows of the day which are also very close to the lows of Monday, yet look at how different the picture in the breadth looked on Monday when the market was at the very same location.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081203ADD.gif">

The relationship between advancers and decliners <B>($ADVN-$DECN)</b> tells a similar tale. In the first 15 minutes of trade, the market goes straight down, yet during that same interval the A/D goes to 1500+ and holds over 1000 at the close of the bar. Again, same thing in the afternoon, where the market retests the lows, yet there are still 662 more advancers than decliners on the NYSE at that very moment (not a stellar number, but healthy).

What you need to take home from all this is that the cash market cannot stay out of sync with what is happening <i>under the hood</i> for very long. When its diverging like this, you must think, "something is up", and expect breakdowns (or breakouts) to fail.

In yesterday's commentary, we touched upon the <b>$VIX</b> briefly. We'll run the chart now and simply say that it's the same type of analysis as the intraday stuff above. The market returns to a level that it was at before. Ok, what are my indicators doing? Are they as bullish or as bearish as before or more so. If they are less so and price is equal then we have to assume that there is some negative divergence and make note of it.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081203VIX.gif">

Much like what the breadth and A/D were doing intraday, the <b>$ VIX</b> seems to be doing the same on a daily chart. We've annotated the levels in the S&P that were the lows of the day on the same days circled in the $VIX. Since the $VIX seems to be failing to test highs while the market tests lows, we should assume that fear is definitely deflating from the markets. Although there are always tons of mixed signals in a volatile environment like this one, thats one for the bull camp in that it would imply that there may not be an equal number of people dumping their positions which were bought last week or during November whenever the market goes down. It's that simple imbalance of course, that's necessary to get any bull action to sustain itself.

We remain cautious and for now still see signs pointing to the higher low scenario. A move under Monday's low would probably negate this theory as we have supported at this <b>$SPX 820</b> area multiple times now. If so, strength should take the S&P to 900 easily to fill the gap between Friday and Monday.
 
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Good Morning, Traders. Looks like we are going to get our <i>higher low scenario</i> that we've been discussing of late. Tuesday was the lack of follow through to the downside and Wednesday was able to make a fresh 2-day high. Remember, that in order for the higher low, higher high scenario to play out, there has to actually be a higher high. The "high" refers to the last swing high on the <b>$SPX</b>. Sherman, set the WABAC machine to a daily S&P 500. Ok, Mr. Peabody.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081204SPX.gif">

We've put little circles and labeled the higher low and where we need to clear to make the first higher high. What's interesting about that target is that the high of that prior high in the green circled area is 896.25. Note how in the picture below there is a gap in the market between 11/28 and 12/1 that needs to be filled. The high of that gap area which would close it is right at <B>SPY 90</b> which corresponds very closely with that <b>$SPX 896.25</b>. We feel that any momentum over the trendline (1st picture) takes us there easily. Once there, we need to see the market close on a daily bar over that number to complete the higher low/higher high pattern.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081204SPY.gif">
 
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Good Morning, Traders. Although it felt ugly into yesterday's close, it was really just an inside day where prices chopped around within the high-low range of the prior day. Market was strong for most of the day but instead of moving into the gap area we discussed yesterday, it used the "bottom of the window" as a resistance point instead. At the risk of sounding like some <b>CNBC master of hindsight commentator</b>, people sold the market ahead of the employment figures that are coming today.

We bought a little gold <B>(GLD)</b> yesterday on the fact that it seems to be basing near the 20ma daily and the <b>UUP</b> is looking like its run back to swing highs is failing for now as the dollar is starting to sag. Today should be pivotal for this trade. The morning numbers are either going to shoot the dollar upwards or downwards and we can expect the <b>GLD</b> to do the dead opposite.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081205UUP.gif">

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081205GLD.gif">

If the dollar takes the news as bullish and decides to jump, we may put a stop on <b>GLD</b> under the first 15minute low, rather than add to the position as we said in the <i>Trade Explanation</i> when the alert was sent. The reason for this is that gold seems to be building a very similar base to the one that it created from 11/16 - 11/20. The fact that this base is higher than the first one tells us that it should not fail to the downside at this point. If anything we would rather add to the position on a move upwards. A violation of this 2nd, higher base would not be kosher at this point.
 
this week's video

If you read up and look at all the reports of the last week or so, they have been talking about this higher low scenario being put in which should lead us to our first higher high soon.

This was evident as there was no follow through on the 12/1 low

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enjoy
 
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Good Morning, Traders. Beautiful, just beautiful. Although we don't yet have the <i>higher high</i>, Friday's strong action which shrugged off morning bad news made it very clear that the 12/1 bar would be our <I>higher low</i>. The illustration is below.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081208SPX2.gif">

We've left the trendline in which is the main downtrend from the October 14th swing high. If we can close a daily bar above the highs of 11/28 (creating the higher high), then we should assume the path of least resistance for prices at that point would be to go to this trendline whose terminus currently sits in the neighborhood of <b>$SPX 940</b>. The high of of the bar in the <i>higher high</I> circle is 896.25. Getting there fills the gap in the <b>SPY and ES futures</b> from 11/28 to 12/1 and a close over that level completes the pattern.

Bias is shifting to bullish here and as such we are holding positions through pullbacks now which has worked out so far <B>(UTHR, QSII)</b>. As this is the second time that the market has tested up to the low end of that gap, we should expect that it fills up to that 11/28 high this week. Longer-term, more aggressive bulls should try and hold positions now all the way to the longer term target illustrated above.
 
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Good Morning, Traders. Looks like we got it! Our first higher low, higher high scenario with yesterday's close above the 11/28 highs. Should be relatively smooth move up to our eventual target as described in Monday's <i>Focus Report</i>. Let's look at the chart on more time.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081209SPX.gif">

The play here is pretty clear. Now that the market has made a confirmed close above the prior swing high of 11/28, we should expect a test of the trendline at the 940 area. You should try and hold longs through any pullbacks until we see this area. That trendline test would be an excellent area to initiate shorts, preferably of the <i>counter-trend</i> rather than the breakdown variety. We will of course be watching internals closely as the market pulls back from that trendline to know how long to hold those shorts and if that area is going to be a real top or just a pause before heading higher.

As we trade this week, be aware of the gaps that exist below us which are still unfilled.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081209SPY.gif">

Don't sell at the wrong time out of panic when the market fills those gaps. In the <b>ES futures it would be the 875-865 area.</b> We say this specifically about selling at the wrong time because it must be true that people do that. If it wasn't then the market wouldn't reverse after filling gaps. Expected turning points in the market work because one side runs out of bullets. In this case, sellers hit that area and then <i>run out of bullets</i> at precisely the wrong time. We could easily see a retest of that prior top area as (purple line) over the next few sessions.
 
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Good Morning, Traders. The gap that was pictured in yesterdays <i>Focus Report</i> barely filled at all and what filling did occur was like pulling teeth on the short side. In the bigger picture we have to construe this as bullish as the market <i>should</i> be pulling back but is basically thumbing its nose at those who want to sell it.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081210SOX.gif">

As we've just gone doji-doji (we love the sound of that) on the broad market dailies, there is little to report on that front. So, we are alerting you to a relative strength <b>blue light special going on in aisle five</b> in semiconductors. We think this has something to do with the action in <b>NSM</b> yesterday but since that's not important, we'll just stick to the facts. It should be apparent for all to see that the circled area in the chart above is a lot more bullish than the S&P. You'll see semis heading up the <i>Strongest Groups</i> section in the <i>Under the Hood</i> below, and they should have been on the top of your sector lists all day yesterday. Keep it on the radar for a pullback entry in <B>BRCM, LLTC, KLAC, AMAT, NSM</b> or any other chip names you like.
 
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