ShadowTrader Focus Report_2008

ShadowTrader_08 · Jan 20, 2009

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Good Morning, Traders. We shall start this morning by observing some fine differences in the current market situation. By mathematically looking at the ETFs (exchange traded funds) of three major indices we notice that in terms of percentage, it was the IWM that sold off the most. The ranking in terms of negative percentage number was: the IWM down - 6.78%, the SPY down - 5.28%, and the QQQQ down - 4.96%. However, the question remains: is the one who has sold off the most that is the weakest of the three ETFs or is there something else that must be examined? Yes, there is. Peter has pointed this out in the video weekly broadcast many times before. Let us turn attention to the SPY on the monthly chart below to grasp what else needs to be looked at besides the mathematical numbers.

<img border=5 width=560 height=650 src="http://assets.shadowtrader.net/charts/090121SPY.gif">

There are only two highlighted points on the SPY chart that we should be focusing on, the green circle marking the December's low versus yesterday's close in orange marking the January's lows. By focusing solely on these two points we could observe that the lows of December were taken out in the month of January, yet that is not the case with the other two ETFs, the QQQQ or the IWM. Now let us go back to the original issue of observing the fine difference in the broad market; the one who has sold off the most is NOT the weakest, as of this morning. One of the main reasons why the SPY is the weakest is evident from the $BKX chart below.

<img border=5 width=560 height=650 src="http://assets.shadowtrader.net/charts/090121BKX.gif">

The $BKX chart has three points highlighted. The main difference between the two charts is the additional blue highlighted area which represents the low of November. The Banks have taken it out. In other words, due to the fact that the financial stocks represent about 11 percent of the Standard and Poors 500, when the whole Banking sector goes down it brings down the SPY with it. Be vigilant of any government interventions in the near future, in such case the technical analysis matters little. The news overrides any technical analysis.

ShadowTrader_08 · Jan 21, 2009

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Good Morning, Traders. The current market environment can be a dangerous one for those with stubborn conviction regarding market direction. Both bulls and bears were equally at risk of the unforgiving reversals that have been on the prowl over the last four trading days.
Please observe the SPDR S&P 500 (SPY) chart below.
 <img border=5 width=560 height=650 src="http://assets.shadowtrader.net/charts/090122Dan.GIF"> Follow through failed to occur to the upside on Tuesday and failed to occur to the downside yesterday. Instead, the (SPY) bounced back yesterday to close right on the descending orange trend line and inside of Tuesday's red body to form a Bullish Harami. The divergence of the CBOE Volatility Index (VIX) continued as it did not rise above 57.36 during trading on Tuesday and actually closed down 18% yesterday. 
So far this week, stock market breadth has been positive and we think the SPY. is again set up to break above the orange descending trend line, but unless you are fast and flexible in this market or trading smaller position size, it might be better to sit on your hands and wait for a more definitive picture to appear. Below is one of the picks in today's ShadowTraderPro Bulls and Bears Section, Inverness Medical Innovations, Inc (IMA). 

<img border=5 width=560 height=650 src="http://assets.shadowtrader.net/charts/090122Dan2.GIF"> We wanted to profile this trade to highlight not only why we think it is a good trade to the long side, but also to illustrate the steps that should be taken before an order to enter a position is ever placed. First, the stock has been in an unbroken higher high - higher low trend since November 21, 2008. The uptrend has been gaining support as shown by a rising OBV trend that has accelerated to the upside this week (blue oval) as a result of recent strong volume (blue box). The second thing we took notice of is how the stock performed on Tuesday in light of a considerable sell off across all market sectors. Highlighted by the magenta oval you will notice that the stock did trade lower, but it recovered much of its losses on the day to close within the previous day's body. This is in stark contrast to Tuesday's price bar formations on the major indices which were all large red bodies. This is another indication that this is a strong stock that should continue its uptrend. Our trading plan for IMA is to enter a long position at 24.58 which is 10 cents above yesterdays high. We will place our stop at 22.90 which is 10 cents below yesterday's low. Now notice that there is very limited resistance (green shaded oval) to the upside to 28.10 whcih was another attractive feature when selecting it as a possible trade. Using this as our target and the entry point of 24.58, our risk reward ratio equals just over 2:1. If the entry is triggered and the stock closes above 24.48 today, we would recommend promptly moving the stop higher to control risk further. 
Remember, ShadowTraderPro recommends that you only risk a total of .5% of your account balance on any single trade. For example, if your account balance were $50,000, the most you should risk on this trade is $250. The difference between the entry point and stop is 1.68. $250 divided by 1.68 = 148.80 shares. Now, round down to the nearest 25 share multiple. 125 shares is the largest position to buy for this trade based on an account size of $50,000. You should plan each of your trades in this manner, hopefully in a quiet setting, before going anywhere near your keyboard to enter the order.

ShadowTrader_08 · Jan 22, 2009

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Good Morning, Traders. This morning we shall break our usual routine of looking at the S & P, instead we shall place our focus on the Russell 2000 and NASDAQ. In fact we shall compare two of them by using 10 year monthly chart in order to see which of the two is stronger. On the
$RUT
chart below we can notice two blue ovals; the first one marks the Russell 2000 high which has taken place on March of 2000 whereas the second blue oval marks the month when the $RUT has again reached that point, which was November of 2004.

<img border=5 width=560 height=650 src="http://assets.shadowtrader.net/charts/090123RUT.gif">

As you can observe from the chart, not only did the Russell 2000 take out its previous March 2000 high ($615) but it has in fact gone even higher, much higher ($850) than its March 2000 high. Now, let us compare the NASDAQ's performance to the Russell 2000.

<img border=5 width=560 height=650 src="http://assets.shadowtrader.net/charts/090123NAZ.gif">

On the
NASDAQ
chart above you can observe that there is only one blue oval marking its all time high ($5,132) of the March of 2000. The reason why there is not second blue oval is that the NASDAQ has never recovered from the dot.com crash. Hence, what does that this close scrutiny of the two indices tells us? The answer is simple it is the Russell 2000 that in the past has recover very fast; therefore, we shall keep our vigilant eye on it again. Do we then disregard the NASDAQ? No. We must look at all three major indices: the S & P, NASDAQ, as well as Russell 2000.

ShadowTrader_08 · Jan 25, 2009

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Good Morning, Traders. We looked at various time frames of the major stock indices over the weekend to gain more perspective on how the market has behaved and what it means to our trading in the coming week. Remember, overall market direction plays a major role in how individual securities perform so keeping a view of the broader market is vital to planning trades, particularly as we enter a new week. Please observe the following charts of the SPDR S&P 500 (SPY) and the Russell 2000 Index ($RUT). <img src="http://assets.shadowtrader.net/charts/090126Dan.GIF" width="560" border="5" height="650"> Above is the daily chart of the SPY. We started our look at the markets with this chart because one event occurred on the S&P 500 index that did not happen on the Russell 2000, the DJIA, nor the NASDAQ. It was the close on Friday which was above the descending orange trend line (green oval). This is an interesting event but it seems to be the result of the passing of time rather than a break higher and desrves further examination. 
Also, there are two other indications from Friday's price bar that are contrary to each other. Notice that Friday was the third consecutive daily bar that failed to clear the top of Monday's large red body. This could be interpreted as being bearish. But traders' looking for bullish signals might argue that Friday's close is a bullish engulfing pattern indicating price could move higher. Clearly, we need to examine other views of the market that could provide more support for either a bullish or bearish stance going into this week.

<img src="http://assets.shadowtrader.net/charts/090126Dan2.GIF" width="560" border="5" height="650"> We looked at the weekly charts of all the major indices. The price action of each was very similar to the weekly chart of the $RUT above. Here we see that the trend remains to the downside with no indication of a reverse to the upside in the near term.

<img src="http://assets.shadowtrader.net/charts/090126Dan3.GIF" width="560" border="5" height="650"> To determine further whether that the market was "planning" some kind of "in your face" reversal, we looked at the hourly chart of last week's $RUT (above). We see that price failed to make a single higher high. Our stock operations are conducted under the law that the market is boss and can do whatever it wants. Observing the chart above though, we don't see evidence that the market is preparing for a break higher early this week.

<img src="http://assets.shadowtrader.net/charts/090126Dan4.GIF" width="560" border="5" height="650"> As we mentioned above, the S&P 500 was the only stock index to close above the daily descending trend line, so we looked at a chart of the SPY's trading last week on the hourly basis (above). We found the SPY traded sideways all week as neither the highs or the lows set early in the week were surpassed. This channeling pattern does not portend a break high early this week either. 
So we come full circle from the first chart in this issue of The Big Picture and conclude that the SPY's close above the descending trend line on the daily chart was more a function of time rather than bullish conviction and the most probable market direction for the early part of this week is sideways to down.

ShadowTrader_08 · Jan 26, 2009

This week's video:

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enjoy,
Shadow

ShadowTrader_08 · Jan 26, 2009

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Good Morning, Traders. We've had many more good ideas than bad so far this year, but today we feel compelled to fall on our sword and review one of yesterday's Bulls and Bears listings that did not work out. Looking at loosing trades is not fun, but we look at every single one of them here at the ShadowTraderPro world headquarters because no matter the level of experience, all of us will forever be students of the market, and we need to learn from our mistakes if we want to improve. This particular trade has a very simple but important lesson that is beautifully illustrated by the following charts. First, let's walk through why we liked the trade and then we'll look at what could have done to put the odds of avoiding a loss further in our favor. <img border=5 width=560 height=650 src="http://assets.shadowtrader.net/charts/090127Dan.GIF"> Above is the monthly chart of Career Education Corporation (CECO) up to the close this past Friday. The stock had all of the characteristics we look for in a trade like strong On Balance Volume (OBV) (highlighted in blue), strong recent volume (highlighted in red) and a sensational bottoming tail. All of these indicators carried even more weight because they showed up together on a weekly chart. This stock appeared to have everything going for it.

<img border=5 width=560 height=650 src="http://assets.shadowtrader.net/charts/090127Dan2.GIF"> Next we moved to the daily chart (above). This chart does not include yesterday's trading so again, you are looking at the exact same picture we were when we made the decision to place CECO on the Bulls and Bears list. Look at the last daily price bar (green oval). It is also a bottoming tail and although volume was lighter on Friday, the OBV was still looking very good. No doubt we liked CECO and we proceeded to place it under the Bulls and Bears section with the entry and stop levels noted on the chart. <img border=5 width=560 height=650 src="http://assets.shadowtrader.net/charts/090127Dan3.GIF"> Now, whether or not you decided to take this trade, we can all learn from what happened next. Above is the 15 minute chart of CECO. As you can see by the shaded price bar, the stock opened Monday morning and hit the entry price within the first 5 minutes of trading. Almost immediately following that however, the stock traded down and the stop price was hit. The trade was opened and closed for a loss within the first 15 minutes of trading on a Monday morning!! The lesson here is to give the market at least 15 minutes to open and jump around before entering an order for a new position. A fairly common rule for many professionals traders is to wait 30 minutes, and from this scenario, you can see why.

Could we have set the stop lower? Yes, but that was not the solution in this case as price traded all the way down to 20.03, well below where an alternate stop could have been placed. 
We still like the set-up of this trade and probably would pick it again given the same indications. Remember, the Bulls and Bears section lists trade set-ups to review and manage yourself, but regardless of where a trade idea originates, you must enact the rule of not entering a new position until 15 or 30 minutes after the opening bell. This will save you from the frustrations and losses that early morning price action can bring.

ShadowTrader_08 · Jan 27, 2009

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Good Morning, Traders. Our scan of over 800 individual stocks after the close yesterday produced zero set ups that we felt comfortable enough placing in the Bulls and Bears section of today's ShadowTraderPro Focus Report. This gives us some indication that we may be in store for continued sideways action today. So in today's issue, we will check in on our long term bond trading vehicle, the iShares Barclays 20 (TLT). Please observe it's chart below. <img border=5 width=560 height=650 src="http://assets.shadowtrader.net/charts/090128Dan.GIF"> We began highlighting this security in the ShadowTraderPro Focus Report once it peaked around mid December of 2008. TLT has a "hard to borrow" status meaning it is not easy to sell it's shares short, so we have traded the downward trend of TLT by purchasing shares of the inverse Ultra ETF named Proshares Trust (TBT).

Yesterday we stopped out of our positon for a 2.6% gain. We have indicated on the TLT chart above where we entered and exited the trade in TBT concurrent with the price breakdown and subsequent retracement of TLT. Our first price target was the bottom of the gap from the previous rally. TLT came within 27 cents of that target level before bouncing back higher yesterday. This is a good illustration of why it's important to take some profits 10-20 cents before price hits a support or resistance level (in this case, the bottom of a gap). Many unseasoned traders are looking to take profits at the exact price of support or resistance or they don't tighten their stop enough as price approaches the support or resistance level. The result is they watch their profits evaporate as price comes close to their price target only to reverse before the target is hit. We aren't advocating using tight stops all the time, but when price is trading very close to your target, lock in profits with a tighter stop. The larger green oval above highlights the first part of the downturn we shorted (listed in ShadowTraderPro Bulls and Bears section on January 2, 2009). The second smaller green oval is the trade we just completed yesterday in the ShadowTraderPro Model Portfolio. Notice we are not trying to pick the tops and bottoms of the price ranges. We are taking the "meat of the trade" where there generally is less risk and price is much more likely to move in your favor. Part of the formula for success in capturing chunks of the move is being vigilant and adjusting your stop as price moves in your favor. (Do you sense a theme here?) Now the question becomes, what opportunities remain for ShadowTraders in this play? The answer is plenty for those with patience. Please observe yesterday's volume. It was the heaviest positive volume in over a month so one could surmise that price could continue to move up during the short term. TLT will not hit consolidated resistance until it nears the underside of the ascending orange trend line. If it does and we receive other indications that the price is stalling, this would be a logical place to re-enter a short trade.


TLT does not have a recent history of trending quietly sideways for very long. Its moves are fast and deliberate which makes it a great trading vehicle. Also, now that TLT has retraced approximately 50% of its recent rally, opportunities for trades to the long side are increased as well.

ShadowTrader_08 · Jan 28, 2009

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Good Morning, Traders. There is no doubt that this is a news driven market as witnessed by trading action yesterday. With that said however, charts do not lie. In fact they provide more than enough information to put us on the right side of the trade. There is a great trader we know who approaches trading through the use of technical analysis. He once said that "charts are the graphical representation of fear and greed that is going on in the hearts and minds of men and women around the world". (Maybe Brad will use this on a Friday as the trivia question: "Name the trader who made this statement and where can it be heard?")

 Let's look at yesterday's most active sector first to see if we can determine levels of fear and greed going on in the markets after yesterday's gap up.
 <img border=5 width=560 height=650 src="http://assets.shadowtrader.net/charts/090129Dan.GIF"> The financial sector drove this market higher and took other sectors, except gold, along for the ride. Above is a chart of the KBW Bank Index (BKX). It ended with a massive gain of 14.4% yesterday, but the question now is will it continue? First let us agree that the banking sector is still in a down trend as the series of lower-highs and lower lows has continued to extend itself. Observe that the the large declining price bar and it's corresponding heavy volume (both indicated with *) was overcome yesterday. This can be viewed as a bullish event as yesterday's volume level was respectable on the BKX. Next we look above yesterday's closing price and see a pocket of "potentially frustrated buyers" who have been in pain since the BKX declined well past the points where they took long positions. These frustrated buyers may be inclined to sell their shares as BKX moves up to a level that is close to their break even price. This would put selling pressure on BKX making it difficult to move higher. There is also a pocket of "potential profit taking shorts" that will be inclined to buy shares to cover their short positions for a profit. This will create buying pressure on BKX. How can we come up with an informed thesis on which of the two forces will "win" the battle. The remaining clue may be the level of volume that underpins both the frustrated buyers and the profit taking shorts. Observe the corresponding levels of volume that we have highlighted. The level of volume for the profit taking shorts is actually higher than it is for the frustrated sellers. This edge of a higher number of short shares may be enough to move the BKX up into the area of the orange oval as shorts cover their positions to preserve gains. Once price is there however it will be time to re-evaluate to determine if the BKX has enough mojo to break over the descending orange trend line and foil the most recent lower high (LH) and break the overall down trend. 

<img border=5 width=560 height=650 src="http://assets.shadowtrader.net/charts/090129Dan2.GIF"> Now let's quickly look at the chart of S&P Retail Index ($RLX) above. You can see that yesterday was a positive day , but the price move did not create any dramatic change of the prospects for the sector. In fact, we have marked the bearish head and shoulders pattern that has formed which may be a good indicator when considering individual names within the sector for the near term. Which brings us to our next chart below. <img border=5 width=560 height=650 src="http://assets.shadowtrader.net/charts/090129Dan3.GIF"> The "Big Kahoona", the "Grand Daddy" of all retailers, the one, the only Wall-Mart Stores, Inc. (WMT).

On a gap up day on the S$P 500 and an up day for the Retail Index, the mighty WMT bumbled, fumbled then crumbled to form a bearish engulfing pattern. It's clear that something is very wrong with Wall-Mart, but you know what? We don't care. All we care about is what we see. A stock that was down on a day when the S$P 500 gapped up, declining on balance volume, a bearish engulfing price pattern, and is in a sector that currently is trading in a head and shoulders pattern. Add it all up and you have a weak stock that should go on your watch list of shorts that could be a play if it breaks the orange ascending trend line.

ShadowTrader_08 · Jan 29, 2009

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Good Morning, Traders. This morning we shall look at the gap filling on the QQQQ.
On the daily chart below you can clearly observe two rectangles marking two different gaps. The first one was created between Friday's close (12-05-2008) and Monday's open (12-08-2009). The second one was created just recently between Tuesday's close (01-27-2009) and Wednesday's open (01-28-2009).

<img border=5 width=560 height=650 src="http://assets.shadowtrader.net/charts/090130Qa.gif">

As you can see the first gap on the chart did not close the next day, whereas the second gap at least has partially been closed by the yesterday's price action. In either case, we need to enlarge our chart by switching from the daily to hourly time frame so we could better scrutinize the QQQQ gap filling tendencies.

<img border=5 width=560 height=650 src="http://assets.shadowtrader.net/charts/090130Qb.gif">

On the hourly chart above, we have zoomed in on the QQQQ price action which shows the first gap filling. The letters M, T, and W stand for the days of the week, and the vertical lines are demarcation of each trading day. As you can see it was only on the Thursday (12-11-2008) that the gap on the QQQQ got filled. It took almost four days to fill it but finally when it did start with the process of filling up the gap, it was done within an hour. Hence the first gap was completely filled near the market close. Let us see if the same holds true for the second one.

<img border=5 width=560 height=650 src="http://assets.shadowtrader.net/charts/090130Qc.gif">

On the second gap, we are looking at the 15 minute chart that shows that it was only in the late afternoon of yesterday that the QQQQ filled its gap. At the first part of the day, the top part of the gap was acting as a strong support. It took all day of knocking on it to break into it. Out of the brief study of these two gaps, we could make two observations; if the market cannot break a significant resistance level, such as the 30 dollar level on the QQQQ, then it can simply gap above it. Once it gaps above it, the gap can remain unfilled for a long time. Observation two, the gap filling tends to be fast, and most of the traders miss the whole or a part of it. We shall be on look out for the gaps, for they can be great trading opportunity but be aware that you must act fast if you are going to trade them. They can be a great intraday plays, especially into the close.

This week we highlighted both WMT and TBT in the ShadowTraderPro Focus Report. It appears that those trades are doing exactly as we anticipated. If you are involved in the trades, please manage your stops as the price moves in your favor on both issues.

ShadowTrader_08 · Feb 1, 2009

This week's video -->
stocks still a bit dull, gold looking shiny...

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enjoy
-shadow

ShadowTrader Focus Report_2008

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