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ShadowTraderPro Focus Report for June 2, 2008 The ShadowTraderPro Focus Report is your every morning dose of market reality brought to you from the resident geniuses at ShadowTrader. Overseen by Chief Equity Strategist, Peter Reznicek, each issue contains a full report on the prior day's action, including market internals, technicals, and what sectors were hot and cold. Each issue also includes the ShadowTraderPro Model Portfolio, which updates members on what stock plays STPro is currently engaged in officially, as well as provide a daily list of long and short setups for more self-directed traders and investors. If you have any questions regarding commentary or plays in this newsletter, please email to focusreport@shadowtrader.net. The Big PictureGood Morning, Traders. The heavy selloff in the S&P two weeks ago put a two month long rally off the lows of March in jeopardy. As such, our main objectives last week were to play the long side for a quick bounce and closely monitor the broad market not only in terms of price action (on the surface) but internals (under the hood) as well. We had a list of questions to be answered by the market this week, so how did it do? The bounce in the $SPX has been disappointing so far for the bulls. Prior pullbacks during the rally have led to strong thrusts up to new swing highs within a few bars. That didn't exactly happen this week, as the lackluster price action just drifted higher with no agenda into resistance. This change of character in price action is to be noted. The market internals during the bounce have been very weak. Friday's chop fest is not a surprise when we are dealing with a +200 a/d line after a breakout to new intraday highs at 10:30 on the $SPX. Breadth readings have diverged from the price action and have been very light all week.  Though most energy stocks are quite extended from any basing action, they continue to the best bets for squeezing out any juice left in this rally (last weeks gains in PVA, SD, SM, and HK are examples of this). The chart of the $XOI above has pulled back to the support of the prior breakout level and the 20ma. The best looking charts in this index are HES and CVX, which are both showing the same pattern. We also see quality pullback action in some drilling stocks such as RDC, ESV, and HERO. While it is late in the game for these setups, they are pretty much the only charts available to swing traders looking to trade in the direction of a strong uptrend with clear industry group momentum. It should be noted that the further a stock extends from a base, the greater the odds become that the next move out will fail. Alhough we don't have the chart here, please take a look at weeklies of anything energy related so that you can see the overextension from the weekly 20ma and the amount of overextension before pouncing on these daily pullback setups. Let the buyer beware!   While the current rally has made us forget about subprime for a bit, here we are once again with the financials beginning to break down. These stocks led the market down in Q4 of '07, and after a few months of consolidation have begun to roll over again. The $SPX has been trending higher with energy doing all of the work while financials have traded sideways to slightly up. Any selloff that leads to another leg down in financials will eventually drag the S&P down with it.  LEH is the leader of the pack here to the downside. Note the light volume channeling action over the past few months giving way to a heavier volume break of the uptrendline. Check out charts of MER, MS, and GS, as they have all taken a turn for the worse here and could potentially roll over.  For those of you wondering what ever happened to those homebuilder stocks....are they ready to be bought? Looking at the chart of the homebuilder ETF XHB above and the answer is no. XHB also broke the uptrend line of the rally from the lows and is bear flagging. RYL, KBH, and PHM are a few charts showing the same patterns.  The chart above is a comparison chart measuring the percentage performance so far in 2008 and details the divergence among the big sectors in the S&P. At the top we see some of the best of energy outperforming by 20-40%. At the bottom we see the financials under performing by 10-20% vs. the $SPX and 30-70% vs. top energy groups. The poor $SPX is caught in the middle of this war, down over 4% for the year. The combination of weak internals and price action and disappointing action in our longs (RICK and DRYS) lead us to believe that the $SPX will struggle to push much higher. We are not calling for the market to fall apart here, as we are approaching the summer and could easily see plenty of backing and filling over the next few months. If that scenario was to play out, we could make the case for playing both sides of the market via relative strength and weakness. On the long side solars, energy, and transports should continue to shine. Its too early to tell what would hold up, but they shouldn't be too hard to spot. On the short side it's best to stick with the weakest performing groups rather than attempt to catch a sharp pullback in stronger names. Under The Hood
Heads UpBulls and BearsLong Ideas
ShadowTrader Model PortfolioTo get the most out of your subscription and for detailed instructions on how to structure your own portfolio, read our Focus Report User's Guide
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