ShadowTrader Focus Report_2008

ShadowTrader_08 · Feb 1, 2009

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Good Morning, Traders. Our neutral to bearish call for the early part of last week was correct, and then news regarding the government stimulus plan caused the market to gap up on Wednesday giving the bulls some relief and cautious optimism. However, the bullish move was short lived as the gap on the SPDR S&P 500 (SPY) was filled the very next day (Thursday) followed by convincing follow-through to the downside on Friday. Let's review the SPY for a sense of where we could be headed this week. <img src="http://assets.shadowtrader.net/charts/090202Dan.GIF" width="560" border="5" height="650"> Above is the weekly chart of the SPY. We have circled the last two bars in green to highlight the opposing tails signaling a level of uncertainty among traders. Also of note is the relative consolidation taking place. During the time period between 9/15/09 and 11/24/2008 (orange highlighted area), the average price range of any two consecutive weeks was 20.14. In contrast, the average range dropped by over 50% to 8.99 between 11/24/2008 and 1/30/2009 (blue highlighted area).

<img src="http://assets.shadowtrader.net/charts/090202Dan2.GIF" width="560" border="5" height="650"> A bearish swing pattern may be developing on the daily SPY chart (above). A lower-high (LH) that was created as a result of last Wednesday's gap up. If a bearish swing pattern is to continue developing, price needs to follow through lower and close beneath the most recent low (highlighted with a red oval). Otherwise, we believe a sideways trend will continue. Now let's review Bed Bath & Beyond Inc. (BBBY) (below) which is listed as a short play in today's Bulls and Bears.

<img src="http://assets.shadowtrader.net/charts/090202Dan3.GIF" width="560" border="5" height="650"> Above is a daily chart of BBBY. There was a bullish swing pattern that was intact since 11/21/08. On Friday, two of the most recent higher-lows were boken. We now think this is set up for a short trade and have marked the entry and stop points on the chart and our first and second price targets.

Based on the first target price, the risk/reward ratio is just 1.16 to 1. However, between our entry and the first price target, there is limited support to stall a downtrend. Also, by observing the orange oval and corresponding highlighted volume on the chart, support at the first price target seems to be weak, so it is possible that this level might be easily breached on a trend lower. The risk/reward ratio based on the second price target equals 1.74 to 1. We may be able to improve our risk/reward ratio if the price closes lower today by adjusting the stop lower.

Finally, the on balance volume has been declining even as the price has traded sideways during January of 2009 which indicates further near term bearishness for BBBY.

brownsfan019 · Feb 2, 2009

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ShadowTrader_08 · Feb 2, 2009

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Good Morning, Traders. Recent commentary in this space and also in the ShadowTrader Video Weekly has our bias as
neutral to bearish for the time being. Nothing in yesterday's whippy action is negating that for now. Major averages ended up "inverted" which is what we call 'em when some are red and some are green. Relative strength in tech caused the Nasdaq to add some points while the S&P and Dow lost some. Relatively tight ranges on the daily bars were present in all. Nothing drives a point home like visuals. Chart please!

<img src="http://assets.shadowtrader.net/charts/090203SPY.gif" width="560" border="5" height="650">

Drawing channels on the daily price action can be a nice objective way to denote current trading ranges in stocks or indices. As shown above the SPY recently broke down from an ascending channel and found the bottom or "backside" of the channel (middle trendline) to be resistant as the S&P made its first lower high at the area with the blue square. As of now we don't know for sure if there will be a breakdown below the lowest trendine or not but we do have the prior information to go on which will shape our opinion going forward. The higher channel being violated and the subsequent retest of its lower area is bearish. The two circled areas (in violet) represent tests of a new lower trendline which will add more fuel to the fire if that line is broken. Any S&P action below the lowest trendline would be more confirmation of the bearish signal.

At first glance, yesterday's bullishness in the Nasdaq Composite, NDX, & Russell might seem to negate the above scenario, but our opinion is that it does not as of yet. Pull up some of those charts as well and you will see the same lower high scenario after a breakdown of the uptrend. One bullish candle does not change that for now. The only thing that would make for a bullish case right now would be a daily bar close up over the area in the blue square. And we would have to see the same scenario in all the majors to really create the "surprise" that would shock bears and bring in buying that could sustain a run here.

ShadowTrader_08 · Feb 3, 2009

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Good Morning, Traders. Quality Systems (QSII)recently reported better than expected earnings on January 31st but received a smackdown nonetheless as the company decided to not issue any guidance going forward due to "too many changes out there taking place beyond our control". That sounds like a pretty good assessment of the entire market. Either way the stocks action on that day drew our attention and is the subject of today's Big Picture.

<img src="http://assets.shadowtrader.net/charts/090204QSII.gif" width="560" border="5" height="650">

The large body bar inside the circle is the earnings release date. It is a bearish engulfment of epic proportions on a major increase in volume. Since then the stock has bounced mildly as the market has been sideways to up for two days, creating the two bottoming tail hammers. While this two bar pattern is most usually very bullish, we feel its better to look out for a failure below the lows of these bars to set up the "disappointment play". Peter often refers to this as the "Larry Williams setup", as Mr. Williams has used this setup extensively. Essentially the concept is simple. Find bars where there is a close at one extreme while prices pushed a decent range away from that closing level at some point in the session, creating either a very bullish or bearish "tail" bar. Take the trade that is opposite the direction of the shadow or tail as the disappointment of traders/investors on the tail not following through will create good momentum as they all have to reverse course at once. We see a possible short entry below Tuesday's low with a stop above Tuesday's high, as the recent bottoming tails in QSII failed to bounce anywhere into the range of the large engulfing bar at all.
 
Remember that all price patterns must always be considered in the context of prior recent price action. That means, never get so hung up on whats happening at the "hard right edge" so to speak that you don't see the signs that are more to the left. That's always where the answers are.

ShadowTrader_08 · Feb 4, 2009

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Good Morning, Traders. There are many observations and analytic principles that we have made light of in previous ShadowTraderPro Focus Reports which have been very useful in navigating this historic period in the markets. We also know that for most of us, the greatest reward for participating in the markets is monetary. But every once in a while, the stock geeks at the ShadowTraderPro World Headquarters get an extra thrill when all of the observations and principles we discuss here culminate at a point in time where we think the market is very close to a dramatic event. Beloved ShadowTraders, one of these thrilling times is here and has us all geeked up.

Please observe the S&P 500 Index ($SPX) chart below.

<img border=5 width=560 height=650 src="http://assets.shadowtrader.net/charts/090205Dan.GIF"> While reviewing this chart, there are three things that come to mind which we have made light of in the Focus Report recently. The first is our reminder just yesterday of not getting "â¦so hung up on what's happening at the "hard right edge" so to speak that you don't see the signs that are more to the left. That's always where the answers are. Well, when we apply this principle to the chart above, we see that the passage of time has brought the major descending blue trend line which began on September 2, 2008 back into play. The last attempt the market made at breaking it was at the peak of the recent rally on January 6, 2009 which is also the most recent lower-high (LH) in the longer term bearish price pattern. Of course, the market will have to deal with this trend line in one of three ways. First, the market can attempt to break through it to the upside and, if successful, possibly march higher to challenge the most recent lower-high and then the overall market downtrend (let's not get carried away). Second, the market could turn tail and run lower which could result in a retest of November lows. Or last, the market could delay the inevitable and trend sideways for weeks, a scenario we find unlikely. The two other things that come to mind when observing the chart above are recent observations we have made that are now merging as we form our market perspective. We stated how the S&P 500 weekly price range has fallen by over 50% since late November. From a technical perspective, this resulted in the formation of the two large ascending channels we identified in Tuesday's ShadowTraderPro Focus Report. The bottom side of the lower channel could easily be tested today and a close beneath it would be bearish. We live by the rule that the market is the boss, but our day to day tracking of the market produces pieces of a larger puzzle that at certain times seem to fit together perfectly. By forming this overall view or sense of potential market direction, we gain more confidence and therefore become stronger traders. There is nothing to suggest that the SPX will challenge the large blue trend line today. In fact, yesterday's topping tail (blue oval), combined with last weeks topping tail on very bearish market breadth leads us to think that today's market will trend lower. We are maintaining our overall neutral to bearish stance, but stay alert because definite market direction couldâ¦no, strike thatâ¦ definite market direction will commence with conviction soon.

ShadowTrader_08 · Feb 5, 2009

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Good Morning, Traders. If there is any doubt that the stock market is a pure indication of how society feels about its own financial health it can be laid to rest today. The rise in stocks yesterday was just the most recent lurch of a very ill patient that is the world economy. Yesterday the patient was given news that a new treatment was on the way to help it recover and it could be approved for use as early as today. This gave the patient hope and stirred his heart enough to cause a stronger than normal blip on the heart monitor (aka the S&P 500). This is reminiscent of the wild swings on the heart rate monitor around the time TARP legislation was being considered by politicians in Washington D.C. These heart rate blips on market indexes will continue to show up on occasion as the latest plan works it's way through the political maze. But regardless of the new treatment, the patient will once again come to recognize that symptoms of his current illness are likely to continue for a considerable length of time into the future. This market is news driven and today we may be in store for the same type of lurching ride as news of the stimulus package is dutifully disseminated by the media. This is about as close as we will come to discussing fundamentals because what has worked for us in the past and what continues to work for us at ShadowTraderPro is technical analysis. It eliminates the hype and noise and serves up just the facts for us to contemplate.

 Now if you are sitting there somehow impressed by yesterday's bullish stagger as some sort of significant reversal day (or even if you weren't) we invite you to review the chart of the S&P 500 Index (SPX) below. <img border=5 width=560 height=650 src="http://assets.shadowtrader.net/charts/090206Dan.GIF"> We usually don't use a weekly chart to illustrate a point before the most recent bar has closed, but this is absolutely the best way to communicate it today. Look at this weeks price bar in relation to last weeks topping tail (both in green oval). This weeks price bar has just 6.5 trading hours left to rise and close above last weeks high to gain any technical relevance. If you need more convincing, please look at the daily SPX chart below. <img border=5 width=560 height=650 src="http://assets.shadowtrader.net/charts/090206Dan2.GIF"> Yesterday's price never exceeded Wednesday's topping tail and to us appears to be part of a sideways move within trend lines which are our best guides to revealing the next significant move in the markets. Because news from our nation's capital remains so uncertain regarding the stimulus package, we have refrained from listing any picks in today's Bulls and Bears section. There is nothing worse than incurring losses, especially from whipsaw price action caused by news updates and we refuse to put ourselves or our legion of ShadowTraders in that type of a situation when it can be avoided.

ShadowTrader_08 · Feb 8, 2009

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Good Morning, Traders. We stated in the ShadowTraderPro Focus Report early last week that we thought the market was very close to a dramatic event. To be clear, last week was not it. Yes, we encountered a respectable week long rally on good volume and strong breadth. It's also interesting to note that last weeks "recovery" was initiated from the lowest opening price we have seen on the weekly chart during this entire bear market. However, the fact remains that this market has a lot of work to do before we will change our medium term neutral to bearish stance. Let's take a closer look at the weekly SPDR S&P 500 (SPY) chart below for further explanation. <img border=5 width=560 height=650 src="http://assets.shadowtrader.net/charts/090209Dan.GIF"> Friday's close was above the long term descending blue trend line and the week ended as a positive large body candle. From our perspective, this is the first of six events that must happen before we become more bullish. The next event that must happen is a follow through of Friday's close. The remaining four of six events tha must occur are violations of the red shaded areas on the chart. We aren't saying that there can't be more bullish action this week, but we remain guarded because this market is still in a downtrend and has not lost its ruthlessness. You might notice we marked the point in time on the chart when the TARP was enacted. We aren't drawing any conclusions from this or making any comparisons to the current stimulus plan or what effect it might have on the markets. We just thought it was interesting to see how much time has passed since then and to stir some of your own thoughts on the subject. We never go into a new week of trading without having done a thorough scan of stocks using the weekly and daily charts. Our scan includes all stocks with a current price above $20.00 that trade 500k shares or more a day. This usually means we look at every single chart of over 800 individual stocks and ETFs. It is a lot of work, but we can't stress enough how valuable it is to our overall sense of the markets. Below is one result of the scans we ran this weekend, Stericycle, Inc. (SRCL). It is also listed in today's Bulls and Bears section. <img border=5 width=560 height=650 src="http://assets.shadowtrader.net/charts/090209Dan2.GIF"> The weekly chart above shows the two consecutive topping tail formations. The second one is particularly bearish because it is underpinned by higher than average volume and by the fact that it occurred during last weeks up move. You can also see that the On Balance Volume, or OBV, has collapsed since mid November of 2008 and has been trending lower over the past two weeks. Let's go to the daily chart below to observe any other information that could be useful in the trade. <img border=5 width=560 height=650 src="http://assets.shadowtrader.net/charts/090209Dan3.GIF"> This past Friday, when it seemed every stock was going up, SRCL ended down 5.74% on heavy volume. It closed to form a bearish engulfing pattern and failed to break the previous lower-high (LH). The information provided by the weekly and daily charts gave us the confidence to plan the trade using the stop and entry prices noted on the chart above. We sometimes get the question of how we establish our exact entry and stop prices. You might have noticed from other Bulls and Bears listings that our entry and stops are usually within a multiple of 5 cents of the high and low of the price bar(s) we are keying off. For example, on this trade we established an entry 15 cents below Friday's low. This insures that we will be put into the trade after a key level of support (blue dotted line) is broken and after enough other traders have entered the short side giving our trade more resilience. We don't want to be stopped out of the trade prematurely either, so to avoid this we set our stop 15 cents above Friday's high. If the price gets up to our stop, the market would be giving us a clear signal that we were wrong and we should not have our money allocated to this position any longer because it could run even higher. This trade set up might be causing some of you to think, "Peter, the stop and entry prices are so far apart. Doesn't that make the trade riskier?" The answer is no. Because the spread between the entry and stop prices is relatively wide, we will simply commit to a lower number of shares in the trade to control the maximum possible loss. Here is the math. The spread between our entry and stop is 3.68. The maximum amount we will risk on any one trade is $500. So $500 divided by 3.68 equals 135 shares. We then round down to the nearest 25 multiple, so we will be shorting 125 shares on this trade without taking on any more risk than our rules allow. Controlling losses should be a trader's #1 priority, or else the market will make sure he or she ceases to be a trader.

ShadowTrader_08 · Feb 8, 2009

This week's video:

How to use relative strength & weakness to "know when to hold 'em, know when to fold 'em"

To watch the video, Click here

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enjoy
Shadow

ShadowTrader_08 · Feb 9, 2009

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

Good Morning, Traders. Yesterday is a perfect example of why you can't simply check the closing prices of your stock positions and think you are on top of things. Those with this "approach" (and there are many of them) are probably thinking that based on price action, yesterday was an uneventful day where traders were waiting for the next stimulus package to be passed.â¦.and then stocks would really take off. The truth is there was plenty of valuable information provided by the market yesterday, just not the kind that is printed on the front page of the daily newspaper or reported on cable news. ShadowTraders, let us pry open the hood and peer inside. <img border=5 width=560 height=650 src="http://assets.shadowtrader.net/charts/090210Dan.GIF"> We are zooming in on the daily chart of the SPDR S&P 500 (SPY) above. Here you can see that yesterday's price failed to climb above 87.95 (a key level on the weekly chart), let alone close above it. Volume was just below average and the price bar formed a doji which is commonly thought to signal indecision in the market. ShadowTraderPro is going a step further however, and stating that traders were not waiting for anything yesterday. In fact, what really happened was an exhausted market was topping out. Below is some of the evidence we drew our conclusion from. <img border=5 width=560 height=650 src="http://assets.shadowtrader.net/charts/090210Dan2.GIF"> Above is a comparison of Friday's NYSE Breadth (left) with yesterday's NYSE Breadth (right). Friday's breadth climbed continuously throughout the day closing near its high of just over 12 to 1 positive. This occurred a day after the NYSE was 7 to 1 positive. In contrast, yesterday's breadth could not eclipse 2.5 to 1 positive and ended the day at 1.16 to 1 positive. Now let's look at the NYSE advancing vs. declining issues for further indications. <img border=5 width=560 height=650 src="http://assets.shadowtrader.net/charts/090210Dan3.GIF"> You can see that we did not get the follow through we were looking for yesterday. Friday's AD Line (left) closed near it's highs after a strong and steady advance, while yesterday's (right) fell back to close just above zero. Both the NYSE Breadth and AD Lines are indicating that the market is lacking the necessary "juice" it needs to clear significant technical levels overhead. Barring any unknown, Herculean news about forthcoming stimulus efforts, it is clear that stocks should continue sideways or just as easily fall back into the previous large body candle and trigger more selling.

ShadowTrader_08 · Feb 10, 2009

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

Good Morning, Traders. It's been said that soldiers who have fought together in battle don't need to describe to one another the details of their experience, they can just nod to each other with full understanding of what the other has been through. Of course trading in the stock market has nowhere near the meaning of fighting in a conventional war, but if you have been trading this market since August, 2008 you might agree that as far as trading goes, it has been a war. In that light, yesterday's battle needs no discussion, a simple nod will do. What is more important is that we carefully plan our strategy for the coming days. Below is a map of the battleground, the SPDR S&P 500 Index (SPY). <img border=5 width=560 height=650 src="http://assets.shadowtrader.net/charts/090211Dan.GIF"> We have circled five points in orange where the SPY has tested the bottom of the ascending channel. This action has stronger bearish significance because it's happening while the overall market is bearish. Therefore, by this and other indications, we think the market has a high probability of breaking the bottom trend line to go lower. If you are short, stay short. If you want to initiate a short position or if you are thinking of adding to your short position (without violating your risk rules) you can approach it in either of the following ways. First, you can initiate a short position after the bottom trend line is breached. For swing trading purposes, this would mean a close below the trend line. Your stop would then be placed at a point above the bottom trend line. Your second option is to wait for retracement and initiate a short somewhere within the blue shaded oval on the chart. You then could place your stop 10 to 15 cents above yesterday's high. With this option, you do run the risk of price breaking the lower trend line without first retracing to the shaded area, leaving you out of the play. Whichever scenario you choose, be sure to stick with your plan. Don't chase the trade if your entry level is not triggered. There are plenty of opportunities in this market. We thought a quick look at the CBOE Volatility Index (VIX) (below) was in order. <img border=5 width=560 height=650 src="http://assets.shadowtrader.net/charts/090211Dan2.GIF"> First we would like to point out that during the run up in stocks on Thursday and Friday of last week, the VIX didn't move down as much (green oval) as one might have expected. Now we see that the VIX has moved up the first two days of this week, but in contrast to levels during past sell offs, it is interesting to note that the VIX didn't move even higher yesterday. Like the markets daily price range, the VIX daily point range seems to be consolidating. We will continue to monitor the VIX and look for it to move up to the blue oval level for further confirmation of our near term bearishness.

ShadowTrader Focus Report_2008

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