| ShadowTraderPro Focus Report for December 3, 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 or comments regarding commentary or plays in this newsletter, please email to focusreport@shadowtrader.net. The Big PictureGood Morning, Traders. If you could please, tap into your memory banks and recall your emotional state at 1:30pm yesterday. Next, please recall how you felt sometime around 2:30pm, and also at the close. We can be sure that there was a wide range of emotion in most people. We bring up this little excercise to so that you can compare what you were feeling to what was happening under the hood inside the market at the time. Were they different? And in what way? Let's look at the market first. Two day 15 minute SPY. What else?  Above is the market. First thing you want to note is that there was no follow through to Monday's bearishness. In a nutshell, that means that the market never went lower than Monday's low and closed well off of Monday's low. Since the both the morning and afternoon reversals seems to come out of nowhere, lets see if there were any clues internally that could have tipped us off.  Look at the two circled areas on the $UVOL-$DVOL above. The market sells off right at the open yet this indicator is postive the whole time. At the afternoon reversal, the market comes close to the lows of the day which are also very close to the lows of Monday, yet look at how different the picture in the breadth looked on Monday when the market was at the very same location.  The relationship between advancers and decliners ($ADVN-$DECN) tells a similar tale. In the first 15 minutes of trade, the market goes straight down, yet during that same interval the A/D goes to 1500+ and holds over 1000 at the close of the bar. Again, same thing in the afternoon, where the market retests the lows, yet there are still 662 more advancers than decliners on the NYSE at that very moment (not a stellar number, but healthy). What you need to take home from all this is that the cash market cannot stay out of sync with what is happening under the hood for very long. When its diverging like this, you must think, "something is up", and expect breakdowns (or breakouts) to fail. In yesterday's commentary, we touched upon the $VIX briefly. We'll run the chart now and simply say that it's the same type of analysis as the intraday stuff above. The market returns to a level that it was at before. Ok, what are my indicators doing? Are they as bullish or as bearish as before or more so. If they are less so and price is equal then we have to assume that there is some negative divergence and make note of it.  Much like what the breadth and A/D were doing intraday, the $ VIX seems to be doing the same on a daily chart. We've annotated the levels in the S&P that were the lows of the day on the same days circled in the $VIX. Since the $VIX seems to be failing to test highs while the market tests lows, we should assume that fear is definitely deflating from the markets. Although there are always tons of mixed signals in a volatile environment like this one, thats one for the bull camp in that it would imply that there may not be an equal number of people dumping their positions which were bought last week or during November whenever the market goes down. It's that simple imbalance of course, that's necessary to get any bull action to sustain itself. We remain cautious and for now still see signs pointing to the higher low scenario. A move under Monday's low would probably negate this theory as we have supported at this $SPX 820 area multiple times now. If so, strength should take the S&P to 900 easily to fill the gap between Friday and Monday. 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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