ShadowTrader Focus Report_2008

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<b>The Big Picture</b>

Good Morning, Traders. The last two swing lows in the $SPX (4/30 and 5/9) yielded many high quality swing candidates, with leading stocks having only pulled back one or two times after breaking out to new highs. The current pullback in the $SPX is playing out in direct contrast to the last two, as there are few long setups to be found and most leading stocks are either very extended from their last base of consolidation or under heavy distribution. Typically when stocks race 20-30% over one to two months odds begin to favor base building action (backing and filling), rather than impulsive price movement.

<img border=5 width= 559 height=660 src="http://www.shadowtrader.net/focus_report_charts2008/080527XOP.gif">

<img border=5 width= 559 height=660 src="http://www.shadowtrader.net/focus_report_charts2008/080527DUG.gif">

<img border=5 width= 559 height=660 src="http://www.shadowtrader.net/focus_report_charts2008/080527DJUSRR.gif">

The S&P has come under heavy distribution as of late, which is usually the "shot across the bow" signaling that the rally is losing steam among institutions. Scanning the weekly charts of everything oil and energy related tells it all. We were hard pressed to find even one name that didn't have a big weekly topping tail, punctuating a parabolic up move that caused prices to pull up and away from multiple ascending trendlines and moving averages. The first two charts above point to the big volume reversal bar action in energy stocks, while the last chart offers further proof of ugly reversal action with a topping tail in the Rails.

As discussed in the <i>ShadowTrader Video Weekly</i> which came out last night, there's really not a lot out there. Almost all weekly sector charts have bearish engulfing or "candles lining up same size bodies" patterns on them. Your best bet right now is to get short-term long on any relief rally up over the 1380 level in the $SPX but to keep a tight leash on 'em so to speak. The 1380 would represent a move over Friday's consolidation and last hourly bar which was a big body red candle. Solar stocks may be putting in a reversal pattern but its not complete yet. All would need to prove that they won't go lower today and close a bit higher than Friday's high. Railroads and Oils (all types) look like a momentum short to us here. If it wasn't a weekly topping tail (which we consider very powerful) we would not bother but these tend to be very prescient. Our job now is to watch volume and breadth on the relief rally that is somewhere around the corner. This market can surprise you. When the picture becomes more clear we'll know and comment on it. Believe that we are scanning extra hard now that the picture is cloudier so <i>Bulls and Bears</i> plays will continue to be only the cream of the crop (as always.....)
 
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<b>The Big Picture</b>

<img border=5 width= 559 height=660 src="http://www.shadowtrader.net/focus_report_charts2008/080528RICK3.gif">

Well, not very inspirational for the bulls so far as the markets did basically nothing. Sideways at lows would have to be considered bearish in the near term. Market had what is known as an <a href="http://www.shadowtrader.net/glossary.html">inside day</a> The <i>ShadowTraderPro Model Portfolio</i> decided to pass on oil shorts for now but we still like some of these for a pullback short play and are watching closely. If you are playing any under the lows of those weekly reversals bars stay with 'em for now you should be rewarded. XOP moved below the lows of said weekly hammer today and is a good example of what we mean. Relative strength and solid stock picking continue to be the way to consistently adding to the bottom line as we did pull the trigger today on RICK. When we listed the stock in the <i>Bulls & Bears</i> last week as a trigger at $22.20, we were only a day early but it was really a no harm no foul because astute ShadowTraders should have passed on the play since it broke the trigger price on very low volume within the first 5 minutes of trade. Remember, when a stock moves into your buy area between 9:30 and 9:35, it must at least be able to clear the high made in those first five minutes of trade to be valid. Always better to pay up a few cents over your trigger once the stock has proven itself. So yesterday ended up being the day as RICK moved decisively over Friday's highs on a huge increase in volume. The stock soared over 6% on the day while the S&P stayed in a mellow range for most of the day with breadth on the NYSE (the king of all internal indicators) being negative about 50% of the time.

<img border=5 width= 559 height=660 src="http://www.shadowtrader.net/focus_report_charts2008/080528EXM3.gif">

<img border=5 width= 559 height=660 src="http://www.shadowtrader.net/focus_report_charts2008/080528GNK3.gif">

One area where you may want to be looking today for a play to the long side is the shipping sector. This group got destroyed last week, some of the names on huge increases in volume which in the longer term picture is not a good thing. These trade ideas we are discussing here are however for short quick hops to the upside and should be played as such. Two names that we like best are GNK and EXM. Both seemed to have the strongest reversals today on their dailies. As you can see from the charts above, EXM came right down to an ascending 20ma daily and stopped the sellers while GNK broke down through its 20 during last week's debacle, but came right into support of its 50ma. We feel both of these technical pivots should be good for upside momentum once yesterday's highs are taken out. Whenever you have a straight down hard move like that you can always make a relatively safe bet on at least a fibonacci retracement to the upside as those straight areas where prices didn't pivot at all will simply not resist as price attempts to move back through them. Also both stocks tested prior swing high pivot areas where their selling abated rather abruptly. Just under these areas would be the stops on any long trades. Our trigger prices are listed below in the <i>Bulls & Bears</i> section.

As for the broad market, same analysis as yesterday. The 1400 on the $SPX above is probably going to be resistant. So far the inside day yesterday tells us continuation of trend (down) rather than snap back upwards to retest highs. Anything can happen, so stay on your toes. It may be a trader's market for duration of summer.
 
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The commentary and charts for tomorrow mornings newsletter are really strong today, we'll post that portion of the <i>Focus Report</i> later on today to this thread.
 
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Good Morning, Traders. The heavy selloff in the S&P two weeks ago put a two month long rally off the lows of March in jeopardy. As such, our main objectives last week were to play the long side for a quick bounce and closely monitor the broad market not only in terms of price action (on the surface) but internals (under the hood) as well.
We had a list of questions to be answered by the market this week, so how did it do? The bounce in the $SPX has been disappointing so far for the bulls. Prior pullbacks during the rally have led to strong thrusts up to new swing highs within a few bars. That didn't exactly happen this week, as the lackluster price action just drifted higher with no agenda into resistance. This change of character in price action is to be noted. The market internals during the bounce have been very weak. Friday's chop fest is not a surprise when we are dealing with a +200 a/d line after a breakout to new intraday highs at 10:30 on the $SPX. Breadth readings have diverged from the price action and have been very light all week.

<img border=5 width= 559 height=660 src="http://www.shadowtrader.net/focus_report_charts2008/080602XOI.gif">

Though most energy stocks are quite extended from any basing action, they continue to the best bets for squeezing out any juice left in this rally (last weeks gains in <b>PVA</b>, <b>SD</b>, <b>SM</b>, and <b>HK</b> are examples of this). The chart of the $XOI above has pulled back to the support of the prior breakout level and the 20ma. The best looking charts in this index are <b>HES</b> and <B>CVX</B>, which are both showing the same pattern. We also see quality pullback action in some drilling stocks such as <b>RDC</b>, <b>ESV</b>, and <b>HERO</b>. While it is late in the game for these setups, they are pretty much the only charts available to swing traders looking to trade in the direction of a strong uptrend with clear industry group momentum. It should be noted that the further a stock extends from a base, the greater the odds become that the next move out will fail. Alhough we don't have the chart here, please take a look at <i>weeklies</i> of anything energy related so that you can see the overextension from the weekly 20ma and the amount of overextension before pouncing on these daily pullback setups. Let the buyer beware!

<img border=5 width= 559 height=660 src="http://www.shadowtrader.net/focus_report_charts2008/080602BIX.gif">

<img border=5 width= 559 height=660 src="http://www.shadowtrader.net/focus_report_charts2008/080602XBD.gif">

While the current rally has made us forget about subprime for a bit, here we are once again with the financials beginning to break down. These stocks led the market down in Q4 of '07, and after a few months of consolidation have begun to roll over again. The $SPX has been trending higher with energy doing all of the work while financials have traded sideways to slightly up. Any selloff that leads to another leg down in financials will eventually drag the S&P down with it.

<img border=5 width= 559 height=660 src="http://www.shadowtrader.net/focus_report_charts2008/080602LEH.gif">

<b>LEH</b> is the leader of the pack here to the downside. Note the light volume channeling action over the past few months giving way to a heavier volume break of the uptrendline. Check out charts of <b>MER</b>, <b>MS</b>, and <b>GS</b>, as they have all taken a turn for the worse here and could potentially roll over.

<img border=5 width= 559 height=660 src="http://www.shadowtrader.net/focus_report_charts2008/080602XHB.gif"

For those of you wondering what ever happened to those homebuilder stocks....are they ready to be bought? Looking at the chart of the homebuilder ETF <B>XHB</B> above and the answer is no. XHB also broke the uptrend line of the rally from the lows and is bear flagging. <b>RYL</b>, <b>KBH</b>, and <b>PHM</b> are a few charts showing the same patterns.

<img border=5 width= 559 height=660 src="http://www.shadowtrader.net/focus_report_charts2008/080602COMPARISON.gif">

The chart above is a comparison chart measuring the percentage performance so far in 2008, and details the divergence among the big sectors in the S&P. At the top we see some of the best of energy outperforming by 20-40%. At the bottom we see the financials under performing by 10-20% vs. the $SPX and 30-70% vs. top energy groups. The poor $SPX is caught in the middle of this war, down over 4% for the year.

The combination of weak internals and price action and disappointing action in our longs (<b>RICK</b> and <b>DRYS</b>) lead us to believe that the $SPX will struggle to push much higher. We are not calling for the market to fall apart here, as we are approaching the summer and could easily see plenty of backing and filling over the next few months. If that scenario was to play out, we could make the case for playing both sides of the market via relative strength and weakness. On the long side solars, energy, and transports should continue to shine. Its too early to tell what would hold up, but they shouldn't be too hard to spot. On the short side its best to stick with the weakest performing groups rather than attempt to catch a sharp pullback in stronger names.

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Phenomenal stuff, shadow.

I agree with your assessment on the oils. Lots look good on dailies but its been straight up when you zoom out to the longer term. Thats when it usually bites people in the ass. I might give them a shot this week but am stopping tight.

I used to listen to you on the tos broadcast. I learned a lot. Have not subscribed to your letter though, am seriously considering it.

peace
 
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The Big Picture

<img border=5 width= 559 height=660 src="http://www.shadowtrader.net/focus_report_charts2008/080603ILMN.gif">

Good Morning, Traders. What took four painfully dull days to build up last week in the $SPX was almost completely erased in just few hours during Monday's quick plunge down. It was the type of session where traders could easily give back 75 to 100% of swing trading profits at the blink of an eye. We noted yesterday's pick up in intensity in the internals and impulsive price action to the downside, which is in direct contrast to last week's poor internals and dull price action. Last week's action did a better job of running the early shorts out of town rather than setting the stage for another leg up. For new traders attempting to establish a feel for market internals as they relate to broad market price action, last week and Monday were great examples to learn from. While nothing is 100% accurate in trading, monitoring the internals intraday will prove fruitful for those willing to put the time in.

It's of little surprise that the days biggest performers off the core sector list were energy related. Coal stocks ripped to new highs leading to a 6% gain in the $DJUSCL, which blew away the competition (next largest gain was natural gas at 0.8%). Coal stock <b>CNX</b> was listed as a long in Monday's <i>Bulls and Bears</i> section with a trigger of 98.35 (it closed at 103.22). Our other energy long <b>HES</b> closed 2.5 points above the listed entry price of 123.42. These energy stocks are extended on the weeklies, but they continue to be the best bet for traders searching for a quick pop. <b>V</b> and <b>MA</b> have held up well and may be forming bull flag patterns over the next few days. Another non-energy stock setting up on the long side is <b>ILMN</b>. Check out today's chart and note the tight sideways action into support of the 50ma on light volume. A long entry can be taken above the high of Monday's doji if the volume picks up.

Popping up on our list of leaders to the downside were the broker/dealer stocks. <b>LEH</b>, <b>MER</b>, <b>MS</b>, and <b>GS</b> appear to be following through on their bearish consolidations from last week on a pick up in volume. Banking stocks <b>WB</b> and <b>BAC</b> are in danger of breaking 52-week lows, while <b>C </b>is consolidating in a tight bear flag and poised to break lower.

Given Monday's pick up in volatility to the downside, odds are that the market will eventually undercut last weeks swing low. We do expect to see continued choppy action, so there may be an opportunity to play both sides of the market via relative strength and weakness. The <i>Model Portfolio</i> is mostly in cash with the exception of one short position in <b>CTX</b>. We are keeping an open mind here, and will look to add positions in the strongest setups.
 
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Bought some SDA on a pullback to the prior breakout level. This is a good way to jump into strong IBD-type stocks. The first pullback to the prior breakout point is usually a buy. We'll post a chart and more commentary on it later.

sda1.gif


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We're keeping an eye on SOL and TITN as well which are also setting up.
 
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The Big Picture

Good Morning, Traders. The <b>SPY</b> and <b>DIA</b> both put in inside days today which usually means a continuation of the most recent trend which in this case would be down. We say usually, but in the face of a Nasdaq that didn't have an inside day and actually made an intraday 2 day high its a tough one to call. The hugely divergent relative strength in the $NDX (up 1.23%) and the $COMPQ (up 0.91%) certainly cement our conviction here that the market does not know what it wants to do next. Without a clear pivot in the broad market we can't justify putting on a bunch of trades at this point. Could be summer doldrums setting in pretty hard-core here.

Oil is certainly still a factor. Yesterday's inventory report caused a knee-jerk spike on the news and then a decline which took the Texas Tea down about $2.00 per bbl. Our prediction that this sector would fall rather than bounce off of those daily 20ma's has turned out right but thats of no comfort really because we are generally against shorting very strong sectors for little pullbacks. If anything we are on the watch for support in the <B>USO</B> and <B>OIL</B> so as to buy some oils. All this current weakness however, does is make the broad market picture more and more cloudy because it was on the back of those energy sectors that the market rallied over 2008 in the first place.

<img border=5 width= 559 height=660 src="http://www.shadowtrader.net/focus_report_charts2008/080605SDA.gif">

The gameplan for now is to trade lighter and try and hit a few singles on standout players with glowing fundamentals to the long side. Try and look for things that can decouple from the US markets and move a bit on their own. Case in point, our <B>SDA</B> trade today. Its a food company from Brazil which as far as their economy is concerned is humming along quite nicely. We did a play today that is a little bit different from our usual M.O. in that we stepped in front of sellers as the stock was falling. There are a few reasons why in this case this was an ok thing to do and not a violation of rules. Check out all of the technical levels in the daily chart of the stock above. In stocks that are growth stories (<B>SDA</B> currently checks in at #68 on the current IBD 100), the first pullback is almost always a strong buy as everyone who missed it the first time is lying in wait to pick up some shares. Yesterday's action in <B>SDA</B> confirmed that as the stock moved opposite the broad market and then stopped selling off just as it came to within pennies of that prior breakout level. Its a good low risk entry point where you can often justify buying at lows of the day. We legged in half at 24.15 and then another half at 24.43, when we saw the 10:30 - 11:30 hourly hammer close. This is usually only recommended on very strong stocks that have amazing fundamentals. Much better of course if you have a firmly rising market but as Winston Churchill once famously remarked, "Nothing avails but perfection may be spelled <i>paralysis</i>".

<img border=5 width= 559 height=660 src="http://www.shadowtrader.net/focus_report_charts2008/080605POT.gif">

Oh, and for all you <B>POT</B>heads out there, the stock still closed $2.00 below our 210 entry. There is however an obvious shelf of resistance at the 212 level which could be used for a re-entry with a stop under 206 which was the low of the high volume selloff that hit our stop and was also yesterday's lows. The chart above should be of help to you. We are strongly considering a re-entry over that 212 resistance, but its obvious from Tuesday's action that these fertilizers get spooked when the S&P decides to nosedive so be on your toes.
 
Bought 400 SOL @ 24.10 @ 10:15am for the <i>Model Portfolio</i>

So far so good, just closed an hourly bar up and over the downtrendline of the pullback for the first time since 5/19. Stop down under recent swing lows at 23.00. These solars are tricky so we'll cut it back on any weakness and run with a smaller piece if we have to. Volume has picked up on the breakout so thats a good sign.

Still long SDA from yesterday and holding.

POT acting exactly as described in this mornings newsletter, which is posted above in this thread. Anyone who didn't wait for a confirmed break of the $212 level got hammered this morning.

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This week's video:

Near-term targets for $SPX and Dow.
Some serious support ahead in the banking index that should stop the bears.
Yen/USD looks good for a trade
A few free trading ideas

All this and more below------>

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