ShadowTrader Focus Report_2008

ShadowTrader_08 · Feb 26, 2009

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Good Morning, Traders. Today we want to show you a classic and real time example of how using headlines as a guide in trading can be a disastrous approach. Last night we ran our scan and noticed that many regional bank issues had traded up into resistance yesterday and closed with a reversal price pattern. With so many of them showing a similar bearish pattern, we did a quick check on line to select one of the several Regional Bank ETF's to profile in today's ShadowTraderPro Focus Report. Our search produced a short list of ETFs, but in addition, there was a column of news stories for the sector with headlines such as "Regional Banks Rally a Second Day, Leading Financials Higher". To any reasonable person, the headline makes it sound like the Regional Banks were strong and the place to be. Anyone using headlines as a guide might think "oh man, I'm missing out, I better get into a regional bank stock fast!!" But after we review the chart below, we think you will agree that now is absolutely the wrong time to be getting long regional banks, in fact, you might want to give serious thought to playing them as a near term short. <img src="http://assets.shadowtrader.net/charts/090227Dan.GIF" width="560" border="5" height="650"> Above is a chart of the SPDR KBW Regional Bank ETF (KRE). It's true that the banks did rally yesterday; in fact it was one of the strongest sectors in the market. But the hammer price bar (red oval) tells us that once the bank stocks hit the overhead resistance built from mid January to mid February 2009 (shaded blue area) traders sold the stocks to lock in gains. Yesterday's high is also very close to a 50% retracement of the down trend from the high on February 9, 2009. We searched the sector for two names that we thought had the best risk reward ratio and listed them as shorts in today's Bulls and Bears Section.

ShadowTrader_08 · Mar 1, 2009

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Good Morning, Traders. Whether the market is headed up or down should not matter to us. Being on the right is of the trade is our main concern, second only to preservation of capital. There is no question that bears are in control of this market; the question now is how far down can they take it? Let's look at the charts below to review the possibilities. <img src="http://assets.shadowtrader.net/charts/090302Dan.gif" width="560" border="5" height="650"> Please observe the monthly chart of the S&P 500 Index ($SPX) above. The February 2009 price bar closed below the most recent support level formed during 2002-2003 (yellow oval). Beneath is virtually no price support as the steep rise over 22 months between January 1995 and November 1996 produced only 3 negative months, 2 of which barely qualified as negative. If this were the daily chart of a typical common stock, it would be listed under the short ideas column in today's Bulls and Bears section with a target price of 483. <img src="http://assets.shadowtrader.net/charts/090302Dan2.gif" width="560" border="5" height="650"> There have been many references and comparisons of this bear market to past declines. If we look at the chart above, we see how close the $SPX is to coming to the same trend line that connects the bottoms of four other substantial market declines (magenta circles) including the market crash of 1929. The support provided by this line for the month of March 2009 is approximately 555. Of course as time moves forward, the support level provided by this trend line rises. This area is represented by the green triangle on the chart. The point is, the S&P 500 could easily fall quite a bit further from current levels before finding any meaningful trend line support. It is true that longer term charts carry significant weight in the overall direction of stocks, but not every single day between now and the day the $SPX reaches the ascending blue trend line (if in fact it does) will be down. The market is still very capable of reversing itself for quick and unforgiving relief rallies. If you happen to be on the wrong side of a situation like this, the market will take large chunks of value out of your account unless you protect it with properly placed stop orders. Stay flexible and be nimble.

ShadowTrader_08 · Mar 2, 2009

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Good Morning, Traders. While we won't re-display the chart from yesterday of the S&P 500 Index long-term trendline, yesterday's action makes it quite clear that we are going there. For the near-term however, the market is quite oversold making it difficult to initiate short positions. Every tick lower makes us rue the moment we tightened the stop on the 02/11/2009 SPY trade due to the President's mortgage comments which juiced the market very temporarily. We live and we learn. Still, we refuse to chase moves, so initiating new directional shorts at this juncture would not be prudent. <img border=5 width=560 height=650 src="http://assets.shadowtrader.net/charts/090303Dan.gif"> A good way to judge if a market is getting too stretched out to one side is to simply use a moving average, such as a 20 period simple, on an hourly timeframe as illustrated on the SPDR S&P 500 (SPY) above. Remember that hourly charts are an excellent tool for swing trading and can help you to hone your entries and exits more precisely than just using a daily chart.
 <img border=5 width=560 height=650 src="http://assets.shadowtrader.net/charts/090303Dan2.gif"> The chart above is of the PS DB USD Index BL FD (UUD) (aka the dollar index). The UUD should touch the resistance level (magenta line) today. We are looking to short the dollar at this prior top for a nice counter-trend rollback. This trade is entered in today's Bulls and Bears section with an entry range highlighted in light blue on the chart above. Please watch GLD for an opportunity to add to or initiate a position as it closed yesterday at 90.93 and is approaching the second support point of $87-$90. We'll be watching it ourselves and buying more GLD in this area along with shorting the UUP. Additionally, we continue to monitor strong names such as AMZN and VPRT for possible moves.

ShadowTrader_08 · Mar 4, 2009

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Good Morning, Traders. There are generally two schools of thought with regard to where this market will go in 2009. The first is a continuation lower to reach levels that today are unthinkable. The second is that the market is overdue for a rally and when it does rally, it will be vicious to anyone caught short. What is most interesting to us at ShadowTraderPro is not the exercise of predicting which direction the market will ultimately go, but positioning ourselves to capitalize on the big move, up or down, when it starts. Most people will not know when it has begun for weeks or even months after it actually has. What will give us our indication? Trendlines. Large amounts of money are at stake, your money. So let us review this simple but most important approach using the charts below. <img src="http://assets.shadowtrader.net/charts/090305Dan.gif" width="560" border="5" height="650"> The chart above of the S&P 500 Index (SPX) is blank on purpose. Imagine trying to determine when a large, overdue rally has just begun without using trendlines. At what price level would you be willing to put your money on the line in an attempt to capitalize on the forthcoming move higher? This non-method is the one that many are working with in deciding to move their money in and out of the market. As a result, they are always late and the next time will be no exception. Now let's look at the same charts with the application of trendlines. <img src="http://assets.shadowtrader.net/charts/090305Dan2.gif" width="560" border="5" height="650"> Above is the same chart of the $SPX. ShadowTraders will not miss the beginning of the next large move because we apply the trendlines that will trigger our initiation of a position when a trendline is broken. We won't necessarily know that it is the exact beggining of the next big move, so after the trade initiation, we use the trendline as a guide in placing a proper stop loss in the event that the breakout is false. This approach is a factor in our view of the next 2-3 days. We think that this current "pop" can take the $SPX back to test the secondary trendline (green). Only a break of this trendline will give us reason to consider that anything has changed from the most recent decline. It is important to be aware that secondary trendlines, particularly those as steep as the green one, are unsustainable so a break of this treandline is possible. We have initiated long positions in the ShadowTraderPro Model Portfolio to capitalize on the potential of this move back to the trendline and possibly higher.

ShadowTrader_08 · Mar 5, 2009

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Good Morning, Traders. On 2/26/09, we issued a ShadowTraderPro Advisory to buy SPDR Gold Shares and set up a trading plan that would not only take advantage of any price appreciation subsequent to that date, but also accommodate what we thought would be a greater opportunity if GLD pulled back. Let's take a look at the chart and discuss the plan in more detail below and where we stand today. <img src="http://assets.shadowtrader.net/charts/090306GLD.gif" width="560" border="5" height="650"> We purchased our first 50 shares at 92.15 the day after GLD formed a bottoming tail (blue oval). If price moved up from here as the price pattern was indicating it might, we would have been glad to capture the move with at least this smaller initial position.
We also stated in our ShadowTraderPro Advisory, "We are taking a small position with the goal of adding to it if gold was to lose this level and fall down into the $870-900 area, which would be roughly $87 - $90 on the GLD etf."
 As the price action evolved over the following days, it did in fact retrace back into the area we considered favorable to add more shares (green shade) and we had every intention of doing so when price reached 87.50. As you can see it didn't come down that low and yesterday's price bar indicates that it won't be doing so anytime soon. Are we bothered that the second leg to purchase shares did not occur? No, in fact we are very pleased that we played the trade exactly as we did. This isn't to say that we wouldn't have liked to get more shares just before GLD took off yesterday, but consider these points.

Had we jumped in all at once and bought 150 shares at 92.15, we would not have had the luxury of a stop price as low as 87.00. In fact, we would have been stopped out on Wednesday for a $500 loss since our rules would not have allowed a stop below 88.81. Instead of a loss, we are still in a trade that is likely to make us money in the end.

Secondly, GLD is not the only trade out there. The money that would have gone into purchasing more shares at 87.50 will simply be reallocated to another trade that is attractive to us.

And finally and maybe most importantly, we stuck with our plan and every time we do this the consistency of our habit in following our trading plans and rules is reinforced further. Making this habit stronger can only lead us to greater profits.

ShadowTrader_08 · Mar 8, 2009

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Good Morning, Traders. If you watched the ShadowTrader Video Weekly you know that the overall trend of this market remains bearish. We believe the S&P 500 will ultimately trade down to the 550 area, but what keeps us from getting heavily bearish in the ShadowTraderPro Model Portfolio is the growing probability of a sudden lurch higher before the market resumes it's grind lower. Remember, nothing goes straight up and nothing goes straight down. We presented approximately 20 swing trade ideas in the Weekly Video. Below, for our subscribers, is more detail on three of them. <img src="http://assets.shadowtrader.net/charts/090309Dan.gif" width="560" border="5" height="650"> Above is the weekly chart of the Double Gold Long ETN (DGP). As you know, we are currently long GLD and just missed adding more to it on Thursday. However, the weekly chart of DGP is telling us that it's not too late to allocate more capital to gold. As you can see on the chart, DGP retraced to the ascending trendline (green) then bounced higher to finish the week with a bottoming tail hammer. Overlaying a Fibonacci Retracement (ascending blue line) from the low on 1/12/09 to the high on 2/17/09 results in the 50% retracement line (blue horizontal) of the trend being tested by last weeks price action before DGP ended the week well above this level. A 50% retracement is not uncommon before an issue resumes it's overall trend. We have noted the entry and stop prices on the chart above and in the Bulls and Bears section below. <img src="http://assets.shadowtrader.net/charts/090309Dan2.gif" width="560" border="5" height="650"> The stock of Dun & Bradstreet Corp (DNB) is being dumped as evidenced by the serious decline of the On Balance Volume-OBV. However the stock price has yet to really reflect this as the price has been recently bouncing between 70.00 and 80.00. OBV is indicating that this will not continue much longer. We would like to enter a short position if DNB trades higher to touch the underside of the green trendline between 74.50 and 75.00 (blue shaded area). With the initial stop set at 76.15 and an entry of 74.50, the trade offers an approximate 3 to 1 risk reward ratio to the bottom of the descending triangle line (blue). <img src="http://assets.shadowtrader.net/charts/090309Dan3.gif" width="560" border="5" height="650"> Another issue with continued erosion of support indicated by the horrific OBV is Vmware, Inc. (VMW). Please observe the green ovals on the chart. They show that OBV is actually lower at the stocks current price than it was when the price was actually lower in October 2008. Last weeks price closed below the previous higher low (blue oval) and formed a bearish price pattern. The entry and stop prices are noted on the chart and in today's listings of Bulls and Bears.

ShadowTrader_08 · Mar 9, 2009

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Good Morning, Traders. Any hopes of a snapback rally were dashed early yesterday after the market attempted to overtake Friday's highs only to run out of energy and promptly resume its downward trend. The only major index that has not surpassed its November 2008 lows is the NASDAQ 100 Index ($NDX). Let's take a closer look at its chart below. <img src="http://assets.shadowtrader.net/charts/090310Dan.gif" width="560" border="5" height="650"> The $NDX has a mere 25.01 points left before it matches its low on November 21, 2008. It is important for ShadowTraders to be aware of this and to note how the $NDX responds once it reaches the prior low. Unlike the S&P 500, the $NDX has at least some support at the 1081.86 level that dates back to early 2003 (orange oval). Whether this will be enough to hold the $NDX from declining further remains to be seen. If it doesn't and the $NDX works its way through the 938.52 level, the next bastion of support would be 795.25. The steady grind lower on all of the indices gives little, if any, indication that the market is prepared to release the spring for a relief rally soon. How the $NDX reacts at the November lows will give us a better idea of what the oveall market's intentions are with regard to where and when it might decide to put in at least a temporary floor. The other indices may be buoyed if the $NDX holds the 1,018.86 level and we will carefully measure our next move if it does. If the $NDX doesn't hold this level, ShadowTrader will be prepared to take a more aggressive stance to the short side as this would hasten the S&P 500's march down to the 550 area.

ShadowTrader_08 · Mar 10, 2009

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Good Morning, Traders. Yesterday's trading was exceptional in the fact that almost every measure of market action was above average. The headlines will tell everyone about the outstanding gains made by each of the major indexes, but there certainly is much more to the picture that we as traders need to be aware of and watch carefully today. Please observe the charts below. <img src="http://assets.shadowtrader.net/charts/090311Dan.gif" width="560" border="5" height="650"> Above is a daily chart of the Total NYSE Volume ($TVOL). Yesterday's volume was the highest level we have seen since December of 2008. If we dig a little deeper we find other market internals that were just as impressive. The AD Line broke the 2000+ level and never looked back. Breadth was so strong that on yesterday's 5 minute chart it only had one red bar. Every sector, except gold, ended higher ranging from 2.10% to 16.30%. With all of this, it would be hard for a trader not to be bullish. But we have left out one other important item. Let's go to the chart of the S&P 500 ($SPX) below. <img src="http://assets.shadowtrader.net/charts/090311Dan2.gif" width="560" border="5" height="650"> As strong as yesterday was, the descending trendline above (blue) has yet to be broken. With all of the positive news and headline making gains yesterday, until that trendline is broken, we are still in a downtrend.
 
Bear market rallies can be sudden and violent because the need to cover short positions is so absolute once the market begins to move higher with the sort of conviction we saw yesterday. An order to cover a short position during a bull market rally is always a market order. That is the gas on the fire that causes days like yesterday. We would agree that a good portion of yesterday's volume was likely due to short covering, but only the trendline will tell us if it was made up of anything more beyond that, namely new money longs.
 
So for today, we must assume that unless the trendline is broken, price will fail and resume its move lower. If however the trendline is broken and we see the internals showing us an intention by the market to follow through on yesterday's reversal, we will adjust our stance accordingly by securing a position on the right side of the trade.

ShadowTrader_08 · Mar 12, 2009

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Good Morning, Traders. Yesterday's market action was almost a duplicate of Tuesday's trading. Every sector was up and market internals were strongly positive. The S&P 500 ($SPX) formed another big bodied price bar and volume finished above average. Let's observe the technical indications of the SPX price action on the chart below and how we intend to approach trading today and possibly early next week. <img src="http://assets.shadowtrader.net/charts/090313Dan.gif" width="560" border="5" height="650"> As you can see, the blue trendline was broken on Wednesday followed by yesterday's very bullish price move. There is not a lot of resistance between yesterday's close and the prior low at 804.30. In our analysis to determine points of resistance, we drew a Fibonacci Retracement line from the high on February 9, 2009 to the low on March 6, 2009. This produced a 50% retracement line at 770.90 and a 61.8% retracement line at 795.47. The 61.8% level fits nicely to support our view that the SPX will most likely reverse direction should it advance to the level of the prior low, but we also think the SPX could encounter enough resistance at the 50% (770.90) level to create "chop" and the opportunity for profitable countertrend plays. On any strength this morning, we will be shorting stocks for counter trend plays. It is important to recognize that countertrend plays are trades that normally carry a 1:1 risk reward ratio. These are not trend plays, in fact they could be thought of more as "bounce plays". In this type of trade, you should be taking profits when the stock has moved in your favor an amount equal to the amount at risk between the entry and stop prices. The name of this style of trade is called counter-trend. If you are counter to the stocks overall trend and don't take profits, you can bet that the market will be back to revoke them from your account. 
The final item of interest in today's Big Picture is our observation that the connection between the U.S. Dollar (UUP) and gold has not followed it's historical pattern. Since the UUP has broken its uptrend after failing at the highs, it will be interesting to see if the historical relationship resumes to influence gold's price action. If it does, it will be beneficial to those that are long SPDR Gold Shares (GLD).

ShadowTrader_08 · Mar 15, 2009

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Good Morning, Traders. After the S&P 500 ($SPX) broke the secondary descending trend line (green) last week with convincing follow through, our short term bias became bullish. Every sector advanced with a level of determination that can't be ignored. However the press upward did loose momentum by the end of the week signaling the likelihood of a pullback early this week in preparation for another leg higher. Let's review the chart of the ($SPX) below for our overall view of how we see this playing out. <img src="http://assets.shadowtrader.net/charts/090316Dan.gif" width="560" border="5" height="650"> We have marked the general course we believe the $SPX will take this week with the blue dotted line. Our job isn't to determine the exact low point the market may hit, but to observe it with an eye for indications of when the market is once again ready to move back up past Friday's high. Outside of countertrend plays, a retracement early this week will not draw us into initiating any short trades. Instead, we will see a retracement as an opportunity to initiate long trades.
 
Currently our target for the $SPX is between the 61.8% Fibonnaci Level and the previous low of 804.30. But as time moves forward, the longer term descending trendline (red) will begin to limit the upside potential of this rally's second leg.
 
The overall trend of the market remains down. There is in fact a host of technical events that must take place before the idea that we have reached "the" bottom can be seriously entertained. But for this week, barring any surprising negative news, we believe there is money to be made to the upside and we will engineer our trades accordingly.

ShadowTrader Focus Report_2008

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