ShadowTrader Focus Report_2008

Not bad, Gobar, but not a very inspiring close. We touched right to that 200ma weekly that we been mentioning but no real show of reversal yet. Weekly bar is big bodied and closed very close to low

Either one more push to scare everyone next week or we sail to 1250 although we think its the first scenario.

Banks showed some early strength today which is a possible flash of a sign. Its meaningful when the absolute shittiest sector out there moves up to the top of your sector list on a weak midday bounce in the S&P. We are long some XLF here with a stop under today's low.

We'll go over everything in the video which we'll post here as usual.

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This week's video is posted. To watch it click here

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<b>The Big Picture</b>

Good Morning, Traders. As we mentioned in past reports, we were looking at the 1325 level in the $SPX as a potential low risk reversal point to establish long positions. While the ugly selling in the first hour of trading on Friday looked to be a perfect scenario of an oversold market with extremely negative internals, the bounce off the 1325 level lasted less than an hour before the selling resumed. The extreme internals readings definitely were there, as the a/d line was -2,000 and the breadth was at 10 to 1 negative, however, the bounce off support was so weak the a/d line barely budged above -1,800.

<img border=5 width= 559 height=660 src="http://www.shadowtrader.net/focus_report_charts2008/080623SPY.gif">

Typically when a market puts in a short term low from oversold conditions, the reversal action is sharp (v-shaped) and doesn't give traders much time to react, as only those who were prepared for a reversal have the conviction to get long. Note the lazy bounce in the <b>SPY</b> from 10:45 to 11:30 on the chart above as anything but sharp. Nothing in the internals or the price action said we were going higher.

The weak bounce led to further selling in the afternoon with the $SPX closing at the lows of the day, and more importantly closing at lows of the week, creating a big body weekly red candle. This ugly candle suggests further weakness over the next few days with support coming in around 1270 - 1256 (see daily chart below).

<img border=5 width= 559 height=660 src="http://www.shadowtrader.net/focus_report_charts2008/080623SPX.gif">

<img border=5 width= 559 height=660 src="http://www.shadowtrader.net/focus_report_charts2008/080623COMP.gif">

While the S&P opened weak and continued to plunge after a short rest the Banking Index ($BKX) held firm and showed great relative strength. Take a look at the intraday comparison chart above of the $BKX vs. the S&P above. Note the early divergence in price action and the decisive relative strength breakout circled above around 11am, as the banks ripped higher after the morning undercut/gap dowmn. This relative strength was a key buy signal for us, as we established our long position in <b>XLF</b> shortly thereafter. All of a sudden some reports began to surface on Friday saying that some banks stocks were trading below book value. Book schnook, the ShadowTrader has been saying for weeks now that these stocks are coming into multi year support levels.

As mentioned above the $SPX has support from 1270 - 1256. If we get there on selling as violent as Friday's, ie: bad internals etc, all the better. The harder it goes there the better chance we have that sellers are washed out and that the bounce will be playable.

As an advanced <i>heads up</i> be aware that the next Fed decision is coming at us hot and heavy this Wednesday at 2:15 pm. Remember, whether they raise, lower, or stay the same does not matter at all, all that matters is how the market reacts.
 
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The Big Picture

Good Morning, Traders. Let's not waste too much time talking about the obvious. Market got roasted, enough said. The internals were bad and indicative of "throwing in the towel" type of selling which is what we need as we get closer to prior swing lows on the S&P. The dow is a different story, as its now 500+ points sub 12k and has lost its 200ma weekly by a huge margin now. S&P has also lost that level and all hopes of our "right shoulder buildout" on the weeklies are pretty much dashed now as it completely failed. The banks totally thumbed their noses at our analysis of monthly charts pointing out the support We never got aggressively long around the 1325 so we are ok, but its still not making our job any easier when everything is getting decimated and making once strong looking charts look broken. Ok, as we said earlier, enough about the past and on to the future.......

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<img border=5 width= 559 height=660 src="http://www.shadowtrader.net/focus_report_charts2008/080627INDU2.gif">

<img border=5 width= 559 height=660 src="http://www.shadowtrader.net/focus_report_charts2008/080627SPX3.gif">

<img border=5 width= 559 height=660 src="http://www.shadowtrader.net/focus_report_charts2008/080627COMPX.gif">

The three charts above are the weekly Dow, S&P and Nasdaq Composite. You could say they are listed in order of weakest to strongest. We're not making any claims of relative strength here though because everything pretty much sucks for longs right now. The Nasdaq is obviously not as wrecked as the other two but we're taking that with a grain of salt here and not going to tell you to buy tech first etc because if that was the case you'd want the leaders and the leaders are pretty much broken right now. <b>AAPL</b>, <b>RIMM</b>, <b>GOOG</b>, etc, nothing looks like any sort of pattern we would buy. We made some decent money in <b>MA</b> long this week but look how it acted once we sold. There was not only zero followthrough but the stock managed to lose $14.00 yesterday, going way lower than the prior swing low which was our buy point. We mention this one specifically not only because we traded it, but because its really one of the strongest issues out there, fundamentally. Lots of charts that are supposed to be the creme de la creme are acting like this.

On each broad market chart above we have circled and annotated where the selling should let up just due to prior support. The main one we are concerned with is the S&P. The most likely scenario at this point would seem to be either a double bottom at the 1250 area, or some sort of "panic" under cut of those levels. On either scenario you would like to see breadth worse than 10:1 negative (we had that yesterday) and A/D lines worse than -2000 (we had that too). At that point, unfortunately the only way to perform would be to take some broad market stuff (<b>SPY</b>, <b>DIA</b>, <b>QQQQ</b>, <b>IWM</b>, etc) long. We say this because there aren't any charts out there that look good right now except for <b>USO</b> which is basically the inverse of the market, and if we go lower, the charts will only look worse.

As today is Friday morning and the weeklies are not fully formed, we're going to pause a day here and not make any entries today so that we can scan through about 1500 weekly charts over the weekend and get a better handle on if there are any specific ideas out there that could move. We'll of course pop those into Monday's <i>Focus Report</i>. Peter will run through about 25 sectors in the <i>ShadowTrader Video Weekly</i> this weekend as well so that we can see if there is a playable move in either direction anywhere. We will end this commentary by just saying that things will improve out there and patience, stock selection, sizing your trades properly, and not overtrading in this environment is key. If you analyze our trades carefully over the last couple of months you'll see that we are kind of in a holding pattern and playing our cards very close to the vest. If we've made any mistake here it has certainly been playing them a little too close to the vest which resulted in a few small stopouts that went on to become big winners
<b>GS</b> (long), <b>SPY, DIA, CTX</b> (shorts) come to mind. So, overall we remain in the game and shall continue onward, keeping our loyal readership informed and safe. Be careful out there...
 
Internals positively divergent on Friday as market went lower but breadth and a/d lines didn't register nearly as low.

Possible bounce point here which should be playable for a small pop. Details in the video.

To watch this week's video click here.
 
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The Big Picture

Good Morning, Traders. Given the brutal selloff in the broad market over the past two weeks, it would be foolish of us to call for some type of significant bottom here, however, we did see some encouraging divergence in breadth on Friday that should lead to a short term relief rally for major indices. To the ShadowTrader faithful it is no surprise that we are big on monitoring market internals for confirmation and divergence. We noted Friday afternoon that while the S&P pushed lower, the breadth ratio (which is the nyse upvolume divided by nyse total volume) did not make a lower low along with the $SPX, which is a clear sign of bullish divergence (we prefer to call it seller's running out of bullets). To access the chart showing this divergence in Peter's video weekly report for 6/29/08 click here.

So with the market looking like it wants to bounce higher from here let's take a look at some of the better setups on the long side.

We kick things off with two broad market etf setups.....SPY and DIA.


<img border=5 width= 560 height=660 src="http://www.shadowtrader.net/focus_report_charts2008/080630SPY3.gif">
<img border=5 width= 560 height=660 src="http://www.shadowtrader.net/focus_report_charts2008/080630DIA.gif">

Keying off of Friday's breadth ratio divergence, we feel the hourly charts of SPY and DIA are setting up for low risk entry points over the afternoon consolidations marked on the charts above. These strong risk/reward entries should be good for a quick pop of a least a couple of days, as we do not expect a new bull market to surface under current conditions.

Let's narrow down our selection down from the forest to the trees. Here are a few stocks we like to the upside also to be played for a quick pop.

<img border=5 width= 559 height=660 src="http://www.shadowtrader.net/focus_report_charts2008/080630GTLS2.gif">

GTLS has been in a very strong uptrend since bottoming out in January of this year. Over the past two weeks this stock has managed to break out and hold its ground while the broad market has fallen off a cliff. We like the support at the prior breakout area just above 45.00, as the past two bars have closed nicely off the lows. Look for an entry over Friday's high, which should confirm the break of downtrendline as well.

<img border=5 width= 559 height=660 src="http://www.shadowtrader.net/focus_report_charts2008/080630DSX.gif">

DSX formed a wide ranged reversal bar on Friday after undercutting the prior swing low of 6/24. Drop down to a 15-minute chart and you will see a sharp reversal off the lows, which more than likely trapped the late shorts sellers using an obvious entry point. Look for the shorts to get squeezed with Friday's momentum pushing the price action above the 50ma and more.

The $SPX touched down to 1272 on Friday, which the area of support from the prior closes and important lows made in late January and mid-March (from 1270-1280). The breadth divergence on Friday is not by any means a sign that this is it and the selling is over. We are just looking for a spot to get something going on the long side. If a trader wants to do nothing at this juncture and wait for stronger confirmation (ie: a daily downtrend being broken) that would be fine too. We are bullish in a "dip one toe in the water to test it" manner.
 
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The Big Picture

Good Morning, Traders. Well, was that it? Maybe. Obviously we have been talking about where some playable support for this thing is going to take hold. The area of the prior lows of the S&P was tested yesterday albeit in a manner that nobody expected. That being a large gap down then rally off the open, then a push just slightly lower, punctuated by a 300 point Dow rally straight off the lows into the close. There were strong arguments internally for both sides of the camp with the bulls winning the argument in an afternoon run which is bullish for some sort of relief rally here. Generally, afternoon buying into the close is indicative of bigger players committing to some new positions or at least working collectively to take some shorts off the table.

Mixed signals continue to abound. Banks were strong but transports were not. The vix is higher but no +30 spike like we have seen in past capitulations. The breadth move off the lows taking the ratio from 15 to 50 (still only parity at close) was decent as was the roughly 1200 point improvement in the a/d line. The close of that indicator, however, at about -500 on the NYSE shows that there were still a lot of losers at the close. The back and forth action of yesterday does make the low more "complex" which can often times give it more resiliency. Overall volume did not do much on the NYSE at all but was markedly higher on the Nasdaq side of things. We could go on and on. We maintain that there still does not seem to be the big gigantic washout that acts as the punctuation point to bear markets. Add to that the fact that the meaningful support on the Dow is still another 200 below yesterday's lows and this test of the S&P in this area is now test number 3 as the inverse head and shoulders argument failed to take hold, and you'd have to say we are probably still in the clutches of the bear.

Some bullishness is being exhibited by the four horsemen of the Nasdaq. Of the four, <B>BIDU</B> seems the strongest and has already been elected "most likely to break its downtrend" of the Nasdaq graduating class of bear market '08. A post earnings <B>RIMM</B> is about as stable as Amy Winehouse. We think it needs rehab and it keeps saying "no, no, no". The picture below is its attempt to show every pattern in Nison's <i>Japanese Candlestick Charting Techniques</i> in less than one week. In the last four trading days, its shown a gap down with follow through below major support on huge volume (1), a reversal bottoming tail (2), followed by a violation of bottoming tail almost setting up the Larry Williams play (3), followed by a bullish engulfment (4). At this rate the stock needs to just make the elusive island reversal before the long weekend and it will have completed the canon.

<img border=5 width= 560 height=660 src="http://www.shadowtrader.net/focus_report_charts2008/080702RIMM.gif">

One thing that does look good right now is gold. Although its strength doesn't make us feel too good about things in general, the chart is undeniable. Note how in the chart below this week's action has finally pushed above the last swing high of the week of 5/23. We like it here on any pullback, even better if it doesn't and can hold this prior high in the $920 ($92 on <b>GLD</b>) area. Nobody knows if this is going to return to former $1k per ounce glories but the setup looks good here. We are looking to establish a position with the usual loose stop that is necessary to get hold a tiger of this distinction by its tail.

<img border=5 width= 560 height=660 src="http://www.shadowtrader.net/focus_report_charts2008/080702GLD.gif">

In closing, its probably worth a shot to get a few longs here if the majors can clear yesterday's highs. Nasdaq stuff seems stronger and is probably a better bet than listed stuff. Banks may get some relief rally going which could be playable. Keep an eye on <b>KBE</b>, <b>RKH</b> and <b>XLF</b> which are an easy way to nibble on the whole sector. We put a lot of thought each day into the <i>Bulls & Bears</i> section below and today is no exception. Our best ideas are there. Step lightly.
 
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The Big Picture

Good Morning, Traders. Markets started off positively yesterday morning, looking to build off of Tuesday's choppy reversal, but strength in crude from the 10:30am inventory report onward kept the lid on the bulls. Recently the crude chart and the S&P chart are totally a mirror image of each other. Its getting to the point now where crude cannot make even the smallest intraday spike without tanking the S&P. The chart below is an hourly which tracks both of them simultaneously.

<img border=5 width= 560 height=660 src="http://www.shadowtrader.net/focus_report_charts2008/080703crude.gif">

This one is the <b>USO</b> which tracks crude on a longer time frame showing the breakout today. There was a close just under $144, which was of course a new record.

<img border=5 width= 560 height=660 src="http://www.shadowtrader.net/focus_report_charts2008/080703USO.gif">

Now here's the weird part. All energy related stocks got absolutely hammered today. All of it. Oils ($XOI) down 3.2%, Oil Service ($OSX) down 4.4%. Natural Gas ($XNG) down 2.6%. Steel and coal got smacked as well. Check out some of the charts below. Everyone who bought the breakouts or any opening strength in these sectors got killed today.

<img border=5 width= 560 height=660 src="http://www.shadowtrader.net/focus_report_charts2008/080703NOV.gif">

<img border=5 width= 560 height=660 src="http://www.shadowtrader.net/focus_report_charts2008/080703PTEN.gif">

<img border=5 width= 560 height=660 src="http://www.shadowtrader.net/focus_report_charts2008/080703KOL2.gif">

<img border=5 width= 560 height=660 src="http://www.shadowtrader.net/focus_report_charts2008/080703X.gif">


This tells us one of two things. Either crude oil is the next to fall and the market should lift a little off of that, or now that the leadership is failing there is absolutely no safe haven anywhere in equities at all and we can expect to see SPX 1200 soon. No way of knowing which it is. Certainly the close of yesterday underneath the left shoulder of the recent inverted h&s pattern on the S&P is negative and points to the latter.

<img border=5 width= 560 height=660 src="http://www.shadowtrader.net/focus_report_charts2008/080703SPXH.gif">

Gold is perking up a bit and we are nibbling on it. Any weakness in the yellow metal should be bought more than likely. The next fed isn't for quite some time so there can't really be any major event that is going to resuscitate the dollar anytime soon. Gold should continue higher now that the prior swing high has been taken out as discussed in last nights letter. Its hard to buy on a breakout though so use weakness of overnight gap down pullbacks to establish positions. Anything substantially between 86 and 92 on the <B>GLD</B> is probably a buy here.

We're not listing anything in <i>Bulls & Bears</i> today due to the shortened session today. We prefer at this point to hold back on new entries until next week when we can have a look at the weekly charts over the weekend. Certainly almost all of our recent forays into the long side have proven fruitless as oversold seems to only lead to more oversold and the market is simply not reacting to any of the prior support levels in the S&P at all.
 
This week's video---->

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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

Good Morning, Traders. With the market continuing to trade at oversold levels, one must be very selective on the short side and look for high quality opportunities with solid risk/reward ratios (though there are not many left). For example going short a financial or casino stock at these levels certainly will not have the risk/reward of going short steel stocks which have recently fallen apart (see daily chart of $STQ below).

<img border=5 width=559 height=600 src="http://www.shadowtrader.net/focus_report_charts2008/080708STQ.gif">

Steel is one of the top performing groups of 2008, but all good trends eventually come to an end in a strong bear market. While the supply/demand factors that have driven steel higher still remain intact, we are simply looking to capitalize on a violent trend reversal for a short term trade. Let's go over the key aspects of a trend reversal that we have listed on the chart above. The first is the false breakout to new highs, which occurred in mid-June in $STQ. The late to the party breakout longs provide the fuel that is needed for this setup to become explosive. Once the breakout fails it is very important for the subsequent sell-off to be vicious, thereby trapping all the longs who failed to place a stop or lacked the discipline needed to accept a loss and cut the position. In terms of percent off the highs, the price action should fall at least 15-20% off the prior highs to make the selling significant enough to wreak havoc on the existing uptrend ($STQ fell nearly 20% off the highs). Lastly after the sharp correction is through there should be a weak bounce of two to seven bars that usually retraces less than 38% of the move down. The short entry point is then made on the first bar that violates the prior days low. This breakdown is the nail in the coffin for all the longs who refused to sell on the weak bounce and are now forced to liquidate a huge loss. This is the psychological aspect of the trade that is crucial to the setup. Sticking with the same group, let's go over another trend reversal in X.

<img border=5 width=559 height=600 src="http://www.shadowtrader.net/focus_report_charts2008/080708X.gif">

Looking at the chart above we see that <b>X </b>has satisfied the important criteria of a trend reversal short setup. We clearly see the false breakout in late June that held up for six sessions before gapping down on July 1. The gap down trapped the longs and led to the ugly breakdown on 7/2 that crushed all the breakout and pullback /buyers. Note the weak bounce over the past two days that hasn't really given the longs much reason to exit. Look for a breakdown entry below yesterday's low (green line) with a stop over the same bar's high (red line).

Despite a higher open in the market, there was simply no appetite for stocks as major indices rolled over through the morning and into lunch on deteriorating internals. For a change of pace we did see a decent rally in the final hour of trading to lift stocks well off the lows. However, the damage was done in the $SPX, as the benchmark index made a new low for the year and closed beneath the March low of 1,256. As we have seen many times in the past, the undercut of an obvious support level can often lead to a significant reversal due to the herd mentality (we all see the same thing). This is something to keep in mind, but we have yet to see the capitulation that so often accompanies this reliable bottoming signal.
 
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