ShadowTrader Focus Report_2008

We shorted SPY and got long BRY today in the Model Portfolio. Not really interested in anything else long at this point.

The drop in some solar stocks is going to set up awesome buying opportunity on pullbacks. We'll be watching and looking to enter somewhere there.

The 1440 top today was discussed in past reports and videos. It was the 50ma on the weekly $SPX that did it.

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The Big Picture

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It was a rough day for stocks within the market leading Transportation Index ($TRAN), as it printed an ugly reversal bar at the highs. Railroad stocks UNP, CSX, NSC, BNI, and KSU closed reversed off the highs on heavy volume (check out the reversal action on the chart above). Shippers DRYS, EXM, and GNK also reversed on very high volume. These reversal bars are warning signs that the trend in place is running out of steam and may soon reverse. Most of these stocks are very extended and will need a few weeks of rest to setup once again with proper bases. Solar stocks have had a nice run here but may need a quick rest to charge the batteries. Light volume pullbacks in leading solar stocks should attract heavy buying interest. The energy sector remains in great shape.

Seemingly out of nowhere the S&P reversed at 1440 and sold off sharply into the close. The ShadowTrader faithful know that in past reports we mentioned the 1440 level (the 50ma weekly) as a minimum target for this rally in the S&P. Yesterday's ugly reversal action violated support from the hourly uptrend line. We took advantage of this decisive break by establishing a low risk short entry in the SPY as it bounced back into the resistance of the same trendline. The SPX has made new swing highs on soft internals, so we are betting that the 200ma (daily) and the 50ma (weekly), and the weak close will create enough overhead pressure to send the $SPX lower over the next few days. We expect a typical pullback in the S&P to the 20ma, where buyers have been willing to step in on weakness during this rally. As the market comes in off the recent swing highs, we should see new swing setups develop on the long side, provided that the price and volume relationships on the NYSE and Nasadq remain healthy. If we see a few days of heavy volume selling on ugly internals and a strong break of the 20ma, then the entire rally would certainly could be in jeopardy.

We do not see the market failing miserably here with crude hitting new all time highs on a chart that's not even the least bit extended. On the heels of strong energy we plan to stick with our recent long entry in BRY, which broke out on an increase in volume and is fueled by 100% quarter over quarter earnings and a strong uptrend. Beyond energy we are interested in very little long. Though the market looks to be in pullback mode, there are not many bearish patterns out there. The long and short side of this market has very little to offer in the way of high quality risk/reward setups, so we remain mostly in cash with exception of BRY and our broad market short.
 
Peter,

I think with financials acting as ugly as they are, this market might have a strong headwind. Bottom line, we're still in a primary downtrend. As always, trade what you see and not what you think. I like your commentary.
 
Thanks, 'Bird.

I totally see where you are coming from and we've been talking about this non-participation from the financials for awhile now. The fact is that the market can just keep going on the heels of energy, solar, and shipping as long as it wants.

I would tend to agree that it is a rally still in the context of a larger bear move and we can't call it over until we take back at least 61.8% of the down move which would roughly put us back to $SPX 1500 and thats a tall order I think from here.

Basically, we keep our outlook short in our newsletter to be able to catch small waves as they happen. Some backing and filling here is what we expect at the 200ma daily SPX and 50ma weekly (1440 area). If the market does not fall down precipitously from here and can hold in a range between 1385ish and the 1440, then we have to assume that its the handle to the 2008 cup that has formed and the market would break higher in late summer.

Thanks for the kind words........

-Shadow
 
Just as a heads up, here is the thought process behind the SPY trade.

Shorted at point 1 which was hourly trendline break of this last rally, first target at point 2 which is 50% fib retracement.

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So far so good, market tanking....
 
Covered 2/3 of short where we said we would in earlier post. Market holding for now at that 50% fibo...

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The Big Picture

Ok so we shorted a little and the market pulled back and we rode it pretty good so far, so now what? Well you have to eventually get long again since thats the dominant trend, even if its still within the context of a larger down move. As the S&P has moved up to that key 1440 level recently (and that 200ma on the daily), we feel its going to be tricky here as there could be a lot of backing and filling for awhile. By backing and filling we mean that there won't be the usual, clean some days up and then pullback to trendline and then smoothly up again. If that is the case, then your longs will frustrate you. So what's a ShadowTrader to do? Well, we say stick with what is working and that still has to be one or all of three places. Namely, Oil and Gas, Shipping and Solar.

While its impossible to say in advance exactly where we would be buyers in any of these sectors since the pullbacks have not all fully developed, we do want to showcase the three areas that you should be looking if you are an agressive bull looking to get long this market.

<img border=5 width= 559 height=659 src="http://www.shadowtrader.net/focus_report_charts2008/080521XOI.gif">

<b>Oil:</b> There is no play here just yet, as the $XOI continues to push higher after breaking out to new all time highs last week. The first pullback from new highs is a low risk entry point to catch a strong uptrend. One could also monitor the price action of XOP which is an ETF for Oil and Gas Exploration. Basically our take on anything energy related here is just wait it out. Don't chase. This is not the time for these. Even our buy on BRY which was not overextended was still at a point when the group had already broken out quite a bit. Watch the price of crude as well (USO or OIL) or the futures if you got 'em. When the time is ripe we will be up on it like roofers.

<img border=5 width= 559 height=659 src="http://www.shadowtrader.net/focus_report_charts2008/080521EXM.gif">

<b>Shippers:</b> Dry shipping stocks have more than doubled off their lows over the past few months and are now in correction mode. GNK, EXM, DRYS, and TBSI are the leaders, however, they are currently selling off on wide ranged bars with heavier than average volume. Look for the price action in these stocks to tighten up over the next week or two, along with a dramatic decrease in volume. <br>

<img border=5 width= 559 height=659 src="http://www.shadowtrader.net/focus_report_charts2008/080520TAN.gif"><br><br/>
<b>Solar:</b> One of the ways to know when solar stocks are going to "heat up" again may be to watch the pullback action in TAN, which is a new etf that tracks this sector. It's made up of most of the bigger names in the group such as FSLR, STP, SPWR, JASO, LDK, WFR, and CSIQ. Alhough there was a bottoming tail hammer on it today as FSLR and others held up better than the broad market, its still a very shallow pullback so far as evidenced by the Fibonacci overlay on the chart above. For now keep the SPF 45 on.

The Fed is releasing the minutes of their last meeting at 2pm today. Tends to shake things up a bit so be on your toes. We covered 2/3 of our broad market short at the 50% retracement of this last up move. Its worth a mention that the market bottomed today right at a longer term uptrendline from the lows of April 15th. We think we could easily slip a bit further, perhaps to the 20ma daily on the SPY which is currently at around 140.25. For now we remain bearish to neutral with our powder dry and waiting for the next setup on the long side should it present itself which it always does.
 
Covering remaining 1/3 of SPY here into weakness at a key technical level. Check the commentary below for more explanation.

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The full version of this report with daily trading ideas and real-time email alerts is available here for $20 per month

The Big Picture

<img border=5 width= 559 height=660 src="http://www.shadowtrader.net/focus_report_charts2008/080522SPY.gif">

Well, we thought we were smart but the market is of course always smarter! The <i>ShadowTraderPro Model Portfolio</i> covered the rest of the SPY short right as the SPDR was hitting its 20ma on the daily (which was also S2 on the intra day ES chart). The FED hinted that the current round of rate cuts is probably over and the market responded by blowing right past that level and moving about another $1.00 on the SPY lower. We were looking for an undercut scenario where that 2pm news push would have been a false breakdown but in reality the sellers didn't abate at all. That's ok though, as we like to say all the meat is in the middle, we padded our bottom line another half of one percent and what we left on the table in incremental profit, we gained in knowledge of the nature of the current market.

If you look at the chart above, you can see that the last touch of the 20ma at point 1, sparked a rally that took us up and over the 200ma daily. You'll also note that in this area the candle bodies were small, indicating that some bulls were already buying ahead of the 20ma touch, knowing that there would be upwards action soon after. Conversely, today's sell off that pierced this level, happened on a big body candle indicating heavy emotion on the part of the sellers and closing well below the rising 20ma, also breaking the uptrend from the lows of 4/15. The uptrend in the Dow is much worse, indicating that index to have rolled over back to a downtrend now.

So what is this knowledge then that can be gleamed from the above technical notes? Well, the first thing is simply that as we said in yesterday's comments, for a little while at least it won't be smooth sailing and the stair stepping up rally has lost steam at the 1440. So this means an increase in volatility. The next thing to point out is that this market could easily stay range bound here between 1385 and 1440. We're not showing it here but pull up a weekly of the $SPX when you get a moment and you'll see the market sandwiched right between those areas with some key moving averages on either side. Two reasons why we think this could be the outcome is simply because of the already established disconnection between oil prices and the market, the latter proving recently that it can go up in sync with the price of crude, and the other is the relative strength in the Nasdaq and certain breakout sectors (mostly energy related). The Nasdaq Composite is still holding its main uptrend line from the mid-March lows. Semis and Transports (important) are actually coming into buy points if they can show some reversal action at trend lines. In a nutshell, what we are saying is this: Although you don't see us committing a whole lot of capital yet to the long side, we still are not ready to totally count this rally out. Today's action should undercut yesterday's low by a bit and then rally a bit as sellers (temporarily??) run out of bullets. The ensuing rally if it occurs will also have its own personality (volume, emotion, internal readings) and then we'll know a little bit more.
 
This week's video:

Oil looking toppy? Probably, unfortunately this may pull down $XOI, $OSX and XOP stocks which have really been the only thing leading the last rally....

Anyone else out there think DUG might be a long setup?

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