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ShadowTraderPro Focus Report for August 26, 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. 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 Focus Report 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 FSYS, VAR, CVD & SQNM. The market got hammered yesterday on strongly bearish internals (remember to check your Under the Hood 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. 
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 SQNM which looked quite different early on. 
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. (SQNM 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 SQNM into a one day wonder, 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 "Be cool like Fonzie..." 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 Model Portfolio is concerned with 3 short, 1 long. It should be noted that even the stalwart $NDX and $COMPQ which were looking bullet proof are now parked firmly below their uptrend lines. Under The Hood
Heads Up
Bulls 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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