ShadowTrader Focus Report_2008

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Good Morning, Traders. Yesterday's action was a perfect example of how relative strength and good stock selection can really save you in a non-trending market like the one we are currently in. In yesterday's <i>Focus Report</i> we said that the breakdown looked false at the moment (and it did) and if the market was strong, you should look to relative strength names like <b>FSYS, VAR, CVD & SQNM.</b> The market got hammered yesterday on strongly bearish internals (remember to check your <i>Under the Hood</i> section below daily but especially on trending days to know the real deal), yet one of the above stocks was up over 7% on the day and was a screaming buy near the open. Let's look at the same charts we saw yesterday but this time with intraday snapshots to check out how the action looked in early trade. Remember while looking at them that all of the stocks were exhibiting basically the same "high and tight" bull flag pennant type formation on their dailies which we showed you yesterday. Knowing that you should always figure that the whole world out there is seeing the same thing as you, and is looking for the same breakout to get long. When it doesn't, the failure is immediate and swift as those who "jumped the gun" and were in early during the consolidation all bailout at the same time when its imminent that it ain't happening, so to speak.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/080826FSYS.gif">

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/080826VAR.gif">

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/080826CVD.gif">

So, these are the three leaders above who were supposed to break out this week if the market was going to do anything. Instead, the surprises continued as traders woke up to about a 7 point gap down in the ES. As you can see from the charts above, all three did not show relative strength and instead people panicked out as all of Friday's big gains were evaporated overnight at the open. This was a key point to note as Friday was once again a "disappointment" type of day as shorts got run by bulls who nullified the recent trendline break in the S&P.

Now have a gander at <b>SQNM</b> which looked quite different early on.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/080826SQNM.gif">

When a stock that is itching to breakout acts like it does above, its a strong signal that its "on and popping" that day and that people want it regardless of what the broad market is doing and its worth a shot. The key to this entry is two-fold. One: the S&P gaps down right to the prior day lows after making a strong day to the upside which was an "upside surprise". Think that everyone needs this bullish action to follow through to either continue covering shorts or get long. When the market gaps down to lows of that day its ultra bearish. Two: If in the face of such a bearish setup in the broad market, the breakout candidate actually makes a reversal bar on its first candle and holds range without snapping down out of it like most bullish patterns did, then the stock is said to be on its own and ignoring the situation and the technical buying begins in earnest. We call this technical buying because its just that. Everyone and their mother basically looking for the same price level to confirm the pattern and buy the stock. (<b>SQNM</b> had no news this morning). Although we picked up some for a longer term managed trade, one should note that this is the type of setup that makes a phenomenal intraday trade. Use of longer term chart breaks for daytrades works very well. Also remember that in the ShadowTrader world, one never fights the tide so if the broad market weakness ends up turning our <b>SQNM</b> into a <i>one day wonder</i>, we'll be out faster than you can say "false breakout". For now hold firm and keep an ear to the ground for further updates.

As far as everything else is concerned, market continues to be a see-saw affair as Friday's gains got obliterated and then some. There was a good reason why last weekend's video was labeled <b>"Be cool like Fonzie..."</b> As mentioned above, it's important to note that internals were quite bad with NYSE breadth running worse than 6 to 1 negative into the last hour of trade. Bias is now sideways to down and we are positioned properly as far as the <i>Model Portfolio</i> is concerned with 3 short, 1 long. It should be noted that even the stalwart <b>$NDX</b> and <b>$COMPQ</b> which were looking bullet proof are now parked firmly below their uptrend lines.
 
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Good Morning, Traders. Markets continue to confound with the see-saw action of one day up and another down, then reverse. Let's report on some tradng ideas, then, shall we?

While the entire rest of the market was up yesterday, biotechs decided to take the day off (major gap down in <b>AMLN</b>) and we chose to dump the <b>SQNM</b> just above entry into the last hour of trade, in order to not risk a further erosion after employing the <i>15 minute rule</i> on an opening gap down below our stop. <b>$BTK</b> which was such a strong leader recently now looks poor after violating the last swing low with yesterday's action. <b>WYNN</b> which we like for a short was a false breakdown but has not violated the stop area and made another doji yesterday in the face of a strong market so its probably still a short. <b>LEH</b> never set up as shares never moved near lows of the two day range of Monday/Tuesday that we discussed yesterday. We got out of all of our recent shorts at a profit (<b>RBN,AMSC,AYI, WDC</b>) and good thing because in usual fashion the market was up just enough to run shorts but late afternoon selling brought it back down close to the open. One of the <i>worst</i> swing trading markets we have seen in years.

Apple (<b>AAPL</b>) moved to the downtrend line yesterday in afternoon trade but as is normal for this market, failed to breakout. Still, it's one of the better charts out there and is worth a look. This bull flag is a buy over yesterday's high which was test number 3 of the pullback downtrend.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/080828AAPL.gif">

We're not going to paste pix of the majors in here but when you have a moment, note how the 20 and 50 period moving averages on the dailies are all tied up in spaghetti fashion right where we are now. Expect more chop until these key MA's are resolved to one side or the other. Overall volume also remains a problem as market participants seem on vacation. We haven't traded a billion shares on the NYSE since August 20th! Bias is sideways.
 
Good Morning, Traders. Ok, not bad.

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Most of the action was in the gap and then just a slow grind higher, but pretty good when you look at it in chart form below. This is an excellent time to check out the majors.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/080829SPX.gif">

Nice move above this slow grind sideways to down. We must assume that at least in the short-term, trend in the S&P is now firmly up. Swing highs above us still, however, from 8/11 to contend with, but certainly more bullish than bearish here.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/080829INDU.gif">

Dow same thing, with a nice 200 point move also over trendline. Same 8/11 highs will be the obvious pivot to get over.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/080829COMPX.gif">

Nasdaq a little trickier. Note in the <i>Under the Hood</i> section below how both the Nasdaq Composite and the Nasdaq 100 were up far less in percentage terms than the others. This is important to note, because it tells us that leadership is shifting. You can also check the relatively poor action in horsemen like <b>AAPL</b>, <b>GOOG</b> and <b>RIMM</b> which would basically tell you the same thing. If the market is going to do something next week it appears for now that money is going to move a bit back into non-tech related issues.

We're starting to see at least a couple of decent patterns develop sector-wise and feel next week should be bullish to kick off a fresh month. Retail stocks have been consolidating at a high of the recent range and would be a spot we would be looking. <b>$RLX</b> is the ticker for that. Transports is another (<b>$TRAN</b>). Oil lost about 2.50 per bbl today and still looks like it has one more move down before the big trendline support, so this sector could be ripe for a quickie. Financials are, of course, still a problem. Even though Banks, Brokers, and Insurance were up 3.5 to 4.5% yesterday, the weekly charts of these sectors are still flat and don't look too appetizing. Until these get in gear, we can't really expect things to really get moving hard. Breadth on the NYSE was strong yesterday and overall volume finally came into the picture, registering an <i>accumulation day</i> in the markets. Two days in a row of 1500+ NYSE A/D lines are impressive too. Again, we say, "not bad".

Bottom line...things looking better. Not all out "buy everything" bullish but definitely better. Today is last trading day before a long weekend, so we won't get into any new positions until next week Tuesday. Expect volume to drop off a bit, especially in afternoon today. If we can hold Thursday's gains on lower volume that would be sublime. We'll have more specific ideas in this weekend's <i>ShadowTrader Video Weekly</i> and in Tuesday's <i>Focus Report</i>
 
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Good Morning, Traders. Friday's issue started with "Ok, not bad", in acknowledgement of Thursday's rally which broke a few downtrends in the market. We'll start off this one with "Ok, this is getting annoying". It seems to be one false breakout after another as the market once again gave back all but a few points of Thursday's gains. If you are <a href="http://www.shadowtrader.net/glossary.html">S.O.H.</a> at this point you are golden. Market showing basically nothing in terms of followthrough. In a word, this market ----- (insert nasty verb of choice).

We often mention that traders should pay close attention to market internals when the indices make big moves to see how much oomph is behind those <a href="http://www.shadowtrader.net/glossary.html">top line figures</a>. Given that, in Friday's issue we made a little fanfare about the market breaking out and internals being strong, with decent breadth, two days of strong a/d lines, and an increase in overall volume. Well, Friday's trade took it all back on numbers pretty much as weak as they were strong on Thursday. Breadth, (especially on the Nasdaq) was poor, and volume was equal to Thursday.

So the mixed signals and lack of direction continue. Both the <b>SPY</b> and the <b>DIA</b> ended their weekly charts on dojis which were almost completely within the range of the prior week. Nasdaq 100 ($NDX) got destroyed and "leaders" there are looking more like nice shorts now than the longs they were trying to set up for last week. The 'mighty' Google (<b>GOOG</b>) is an excellent example.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/080902GOOG.gif">

<B>GOOG</b> has sold off to an area of what is called "minor support" as opposed to "major support". Major support is when you have a swing low that ignites a sizeable rally. Minor support is simply some sort of bounce pivot within the context of the major support to recent swing high. Major support areas generally act as magnets and do not let stocks fall below them without multiple tests. In the chart above you can see the opportunity for a short below the minor support area of last week's low for a move down to the major support area of the $415 area.

This weekend's scans returned very few longs. Most of the shorts seemed to be in the Oil Services and Independent Oil and Gas sectors. This is more than likely due to the bearish setup in crude currently which is being goosed by the freakishly strong dollar. We'll wrap it up here with a shot of <b>USO</b>.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/080902USO.gif">

The <a href="http://www.shadowtrader.net/glossary.html">topping tail</a> pattern above on the weeklies simply indicates that oil prices have tried to bounce unsuccessfully for two weeks now. Every run upwards has been beaten back down. This is due in no small part to a dollar that seemingly does not want to give up any of its recent gains. Check <b>UUP</b> to see that (and a possible long setup). If crude makes another leg lower, then the bearish patterns that we are seeing in the energy sectors will work out to the downside. Will such a move be a positive for the market? At this point we don't think so. The disconnect between the long oil short stocks trade seems to be in place now. Crude lost a $1.30 on Friday as stocks all failed the breakout en masse.

Bias is sideways again. Counter-trend plays for quick pops can be a good bet in this market. Breakouts to new highs are not working very well, nor will pullback plays for now as market just gyrates around. We'll continue to put out the best we can find and trade conservatively for now. Also remember that September is statistically a down month for stocks, which could explain the failed breakout on the last trading day of August.
 
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Good Morning, Traders. Despite the relative strength in banking and retail, the S&P was dragged down by a relentless selloff in commodity stocks, with many former market leaders falling by 10% or more (<b>X</b>, <b>BUCY</b>, <b>ACI</b>, <b>JRCC</b>, and <b>CF</b>). We continue to see the disconnect between crude and stocks, as Tuesday's substantial selloff in oil failed to pump up the broad market. Per yesterday's commentary, the weakness in oil helped the dollar to follow through on the breakout entry in <b>UUP</b> above 24.00.

Our first chart tonight pretty much represents what is going on and why this market is so difficult right now.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/080903SPX.gif">

One can adjust to this type of slop by playing both sides of the market (long & short), taking smaller gains, as well as taking quick counter trend setups. Those looking for gains of more than two times the initial risk will more likely be disappointed, as range bound markets do not reward traders who usually sit through pullbacks to hit that triple or home run. We don't see much changing as long as the $SPX holds its current range.

Over the past two weeks the price action in leading stocks has been disappointing. While broad market indices have managed to bottom out in July, there has been very little follow through in leadership stocks.......not much to get excited about.


<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/080903VAR.gif">

<b>VAR</b> is one such leader that has failed to impress with yesterday's ugly reversal bar failure at highs. This type of action suggests at the very least a pullback to or undercut of the 61.50 support level.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/080903SQNM.gif">

<b>VAR</b> reminds us of the recent breakout action in <b>SQNM</b> which also printed an ugly reversal bar at highs after breaking out on 8/25. Though this stock hasn't fallen apart its done nothing over the past few days......stocks that go nowhere aren't worth holding.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/080903NDX.gif">

The Nasdaq 100 followed through on Friday's weakness and led all markets to the downside. The $NDX is now trading back below the 50ma and has clearly broken the uptrend on the chart above. Yesterday we discussed a potential short entry in <b>GOOG</b> which is still in play. Look for a selloff in <b>BIDU</b> if/when it breaks support at 300.00. <b>RIMM</b> broke the 50ma on heavy volume yesterday and is shortable below the 200ma, especially if it can consolidate for a week or two around 115.00 before breaking down.

Continuing with our disappointing action in bullish setups theme............


<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/080903AAPL.gif">


The setup in <b>AAPL</b> had great potential with an impulsive move off the 8/4 low followed by a shallow pullback on lighter volume, but there were no takers. The best bull flags typically breakout after consolidating for as many bars (or less) as it took to form the pole (the time element is important). For example from the 8/4 low, <b>AAPL</b> rallied 7 to 8 bars higher on the chart above to form the pole. The flag portion should have broken out in as many bars or less (around 4-8 bars) to show impulsive behavior. On 8/29 <b>AAPL</b> broke down around bar 13 of the consolidation which is just too long .

Bias remains sideways. Traders will be best served by being nimble, as oversold conditions can quickly turn in to overbought within a day or two and vice versa.
 
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Good Morning, Traders. The banking index ($BIX) has shown pretty good relative strength versus the $SPX over the past few days as well as the past two weeks. Check out the hourly comparison chart below.


<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/080904BIX60.gif">

The $BIX is up more than 12% since 8/26 while the SPY is basically flat.


<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/080904BIX.gif">

The daily chart above shows the $BIX coming into resistance from the highs of the range. A breakout above the highs would be a big positive for the market, however, we expect the short sellers to come out of the woodwork at the highs of the range, as it's a low risk short entry point. Breakouts from obvious trading ranges are often fueled by short covering. Once the shorts are run (shaken out), the price action reverses back into the range (false breakout) and can quickly fall apart to the lows of the range within a few days.

With the broad market selling off late in the morning yesterday, there was not much action on the long side from stocks that are in a position of strength. We did notice a handful of biotech/medical stocks in the green such as SQNM, VAR, BLUD, ALXN, ACOR, and UTHR. Biotech and medical have been the clear cut leading industry groups since the broad market bottomed out in July. Though the recent price action from leading stocks in these groups has failed to impress, they remain the best candidates on the long side if/when this market decides to push higher. Rather than playing individual names, one could look to the SPDR Biotech ETF (XBI) to gain exposure to the sector. The daily chart below shows XBI coming into an important support level.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/080904XBI.gif">

XBI broke out from a base around 60-61 and ran about 15% before stalling out. The recent pullback has been on lighter than average volume and the price action has been orderly. Note how the uptrending 50ma has caught up to the sideways action to provide support. Successful breakouts on average run about 20% to 30% before stalling out. The first pullback to the 50ma after a strong breakout is a quality low risk buying opportunity. Once could look to establish a long entry on strength on the move out above 65.00.

With the $SPX trading near the lows of the range we could easily see a bounce in price to close out the week. As the market continues to chop around, traders will be best served by establishing long positions on weakness and short positions on strength.
 
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Good Morning, Traders. This is what happens when you lose an uptrend that was shaky to begin with. We've been ending recent <i>Focus Reports</i> with "bias is sideways". We can pretty firmly change that to "bias is down", now. So, what to do with it? Well, seeing as the market just obliterated any chance of bouncing at the bottom end of the S&P range (1260-1265), we would have to say short any bounces. The entire last couple of months have been defined by a rangebound S&P that has been grinding sideways with little spikes of bullishness thrown in here and there. When a breakout of the range finally happens like it did yesterday, its worthy to check out internals to see if it was 'serious' or not. If you peek down below to the <i>Under the Hood</i> section, you will see that it was very serious, indeed. Note how the breadth ratio (in blue) on both exchanges is below 10. The breadth ratio is a simple calculation of the up volume divided by the total volume. Even the thinkorswim monkey can tell at a glance that a sub 10 reading means breadth was worse than <b>10:1 negative.</b> Both advance decline lines were sub 1500 with the NYSE decliners smacking advancers by more than 2,000. Both of these are rare and are indicative of across the board selling. Remember, the bulls are looking for these 10:1 up days to confirm rallies. It's just as important on the other side. Overall volume upticked as well, so when you put it all together you gotta say "Go, Bears", even if the Chi is not your hometown.

In addition to the technical/internal picture is the fact that as we have been discussing in recent commentaries the weak crude picture is not only not helping the market at all anymore, its not helping even any individual sectors either. In a less bearish situation, we would have at least expected the Transport stocks <b>($TRAN)</b> to rally a bit. Not so at all here, and even the Airlines (<b>$XAL</b>) which had a nice pop on Tuesday when the oil gapped down, have given pretty much all back. Transports are actually coming in to a level of support here at the 4850 area but as for buying them our stance here is probably "Ok, you first".

While the backing off helped out our live examples of <i><b>"counter-trend trading"</b></i> this week, the question is of course, where to go next. Just saying short is not so simple as most of everything has pushed downwards pretty hard all at once. For this reason we would say look for the bounce to short into. The major averages now have strong odds of moving back to swing lows on a move that we like to call "filling up the triangle". Check out the charts below:

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/080905SPX.gif">

Any bounces between here and 1200 should be shortable. The uptrendline always forms the hypotenuse and the prior low is the base. Once the trendline is broken, the move down forms the other leg (also known as a <i>cathetus</i> for you extreme geometry nerds out there).

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/080905INDU.gif">

Same idea in Dow, with 10,830 as the next target.

No sectors in our daily sector scan came up with any pivots that are playable currently. Our plan is to check out the weekly charts over the weekend for some bearish weekly setups that will take us to the targets above in the broad market and also to be on the lookout for any bounces on lower volume that are shortable. The <i>Model Portfolio</i> is currently flat after closing out three counter-trend shorts successfully. In the current market environment it was the professional thing to do to cut our size down and trade lighter. We'll keep the half size on until the end of the month, then go back to the original model of $500 risk per trade on the first day of Q4. We'll report more on that as the date comes nearer. We could be faced with a large gap this morning as we are expecting <b>non-farm payrolls</b> and a reading on the <b>unemployment rate at 8:30 am.</b> If short, stay that way for now, if not don't chase. Get ready for the fireworks...
 
This weekend's video

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Good Morning, Traders. Action yesterday morning pretty much on par with what we discussed in yesterday's letter. Market did indeed break down from highs early on and fill the gap to Friday's close in the <b>ES</b> futures. Problem is, buyers stepped in around midday and held that low, closing it higher and still, unfortunately, right in range. The weekend's scans did not turn up too much stuff in terms of directional plays, meaning there were no clear chart patterns that jumped out at us showing stocks that were ready to resume strong trends. Mostly everything is choppy, including sector charts, which are in our opinion the drivers of the broader averages. If you scan and your sector charts are all showing you nothing, then how is the market as a whole going to do anything? This creates a chicken or egg first scenario because you don't have any strength in the sectors that matter, yet news wants to take the market higher.

So you have to play counter-trend or simply play between support and resistance instead of looking for stocks to break out into new areas. The market is too choppy for that to work currently. In a recent <i>Focus Report</i>, we had a chart of Google <b>GOOG</b> showing you where we thought a breakdown would occur between minor and major support. That scenario has since played out perfectly and <B>GOOG</b> is fast approaching that major support. Let's visit with the seach behemoth again for a minute.

<img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/080909GOOG.gif">

We've been seeing a lot of emails come in recently from traders listening to the <i>Squawk Box</i> asking about where support is in this widely held issue. In the chart above, you can clearly see that once the minor support was broken, even today's monster gap up was not able to really stem the tide and stop <b>GOOG</b>'s move to the major support area. That being said, we would be buyers of GOOG right at that 412-413 area with a healthy stop underneath (at least $5), on any market strength. If you can get the same amount as the stop out of it in profit, be happy and leave the building. Remember that counter-trend bounces against support and resistance are often 1:1 risk reward. There is no trend, so you are not playing for a trending move. The key to success is the market strength and not just blindly putting in a limit order and watching it get filled as the stock heads to those prior swing lows. You have to think like this....When the market is turning the names that will be the easiest pickings for quick gains are stocks that are already moving off of areas where there is obvious demand. We already know that there is an imbalance of individuals who think that $412 is cheap for <b>GOOG</b>, so if the market is catching a bid at the moment anyways, it will be very easy for buyers to overcome sellers at this juncture because we already know they have done so in the past, therefore there are less sellers at that area anyways. It's just one big auction with an enormous amount of bidders and sellers. That's it, nothing more. However you need there to be strength in the market itself at the moment for this to work. So use your internals and all the other tools in your arsenal to dope that out first. If you have a good feel for intraday direction, then buying at areas of prior support on larger timeframes is a recipe for success. Think in these terms and you'll be good to go.

The broad market continues to do nothing actually, with yesterdays' <b>FNM</b> news sending us right back up into trading range. Homebuilders were the strongest sector on the </i>Core Sector List</i> today. (Ugghh) It is for that reason that we showcase an idea like <b>GOOG</b> above to get traders into the mindset that this is a "stick and move" market and not a trending one. What is hot one day is cold the next and support and resistance areas are acting as bounce points, instead of areas where stocks are looking to break through and establish new ranges. Use this to your advantage and play accordingly.
 
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