Each week, we select one email from the hundreds of thousands that we receive each week (slight exaggeration), and answer it live here in this forum thereby educating readers and making one lucky person famous for the day.

Email your questions in to asktheshadow@shadowtrader.net and we'll take it from there.

Dear Shadow,

Is there a way to use technicals to see if market breadth is changing over a longer timeframe than just one day? More specifically, I'd like to see if the majority of market equities (stocks) are lagging behind and/or catching up with the market leader stocks.

Also, according to William O'Neill (IBD guru), the above could be used to signal a top (all stocks catching up to leaders), or a bottom (leaders pulling away from all stocks)...do you agree?

RJ - Fort Lauderdale, FL

Two questions, RJ. Well that'll cost you double, then. When I look at breadth over time, I like to use what I call the "Breadth Ratio" as opposed to just the breadth. The breadth as I define it in ShadowTrader world is simply the up volume minus the down volume aka $UVOL-$DVOL. The breadth ratio is taking the up volume and dividing it by the total volume to find the ratio of up volume to total volume. I multiply the result by 100 to give me a number between 1 and 100 and I plot it below the SPY or S&P 500. I don't know how to do this using thinkscript but I imagine that its not too difficult. Once you have this number running below your chart, you can set the chart to daily and your chart will plot what the breadth ratio was at the end of each day underneath your broad market candles. On strong up days, the breadth ratio should be well over 80, indicating that the up volume was 80% of the total volume. You'll want to look for divergences where the market for instance makes new highs but the breadth ratio stumbles in the 60-70 range and/or makes lower highs. The breadth ratios for the NYSE and the Nasdaq are both listed every day in the ShadowTraderPro Swing Trader. Subscribers are encouraged to write these figures down every day and can find divergences that way as well.

As for the second part of your question, I honestly don't know how to do this other than to simply do the homework each day with a lot of scanning and note whether or not only the cream is sitting at the top or everything else is too. In my opinion, O'Neill's point is valid. When a market is in the very early stages of a bull run, the quality stocks that will eventually be called "leaders" begin to pull away from the pack first. In the late stages of a bull run, you have money being put into what some traders call "trash" or low quality stocks that don't really deserve the valuations they now have, but are just being lifted by the general bullishness as investors begin to throw caution to the wind and put money into anything. As we know, this bullishness is very often at its strongest at market tops when the uninformed are entering the party way too late.

Systems (III) - Adjusting Systems:Stops and Targets

When adjusting systems, we aren’t limited to just adjusting the indicators or the time frame used. Some of the adjustments can be profit targets and adjusting stops. As an example, let us assume we have a 5 period moving average system. With no stops, buying with a close above the moving average and reversing and going short with a cross below the moving average, we end up on the past 8 trades on the EUR/USD with a loss of 5 pips.

By adjusting the stops after reviewing the data, we could have moved the stop to 60 pips and turned the system profitable at 11 pips gained. A tighter stop of 50 pips, however, would have made the system worse at a loss of 93 pips. This is evidence that a stop loss that is too tight does not reduce risk but increases the number of times a loss occurs and eliminates chance for gain.

By combining both a reasonable stop and a profit target based on the mode of the largest gains, we could have had a very profitable 8 trades. Placing the stop at 60 pips and the profit target at 110 pips, the 8 trades win 278 pips instead of losing. That is a considerable improvement. We will be adjusting and balancing out our profit targets and losses in the systems that will be traded in 2010.

The trade of the weekfor last week is still open. Things are still running well. We got into the GBP/CAD trade prior to the break of the neck line. We are expecting price to run up and confirm the inverted head and shoulders pattern providing us not only the 500 pips between the channels but the entire distance between the neckline and the head which is about 1700 pips. This could give us a total of 2200 pips and we plan on adding to these positions as we break through key resistance areas and find new support areas. We got in at 1.73, so we are currently up about 146 pips.

Lot's of questions during the Pairs Hour which is live on Thursdays (on ShadowTrader channel right on your thinkorswim platform) concerning the basics of pairs trading. At the end of last week's program Peter suggested that newbies punch a couple of pairs into their order entry in tos and then just watch them on the Monitor tab. This excercise will answer so many questions as to how pairs move and how one profits from them.

To that end, we present here an actual pair trade that ShadowTraderPro Pairs Trader subscribers are actually in right now and that could still be in play for a Monday morning entry.

We've selected HD-LOW for this exercise specifically because the pair is not too volatile, has good correlation and trades in a nice range. If all of this is greek to you, please do the following on Monday morning, preferably using PaperMoney. Punch "HD-LOW" into box in the trade tab. A standard level I bid-ask will pop up, however it will be the bid-ask of the HD-LOW spread. Click on the ask price which will bring up two lines below in the order entry. Change the size on HD to 178 and the size on LOW to 219 (dollar weighted $5k per side) and change the Order type from Limit to Market for both of them. Hit confirm and send.

In your monitor tab, group the two stocks together so you can view them as a pair. If you don't know how to do that, go back to Pairs Corner in the November 22nd issue of the ST Weekend Update here. Sit back and watch. You'll "get" pairs right away.

If you are interested in receiving the Pair of the Day, along with real-time email alerts of pairs trades you can follow along with, all for the low, low price of just $20 per month, click here

The Pairs Hour with Peter Reznicek is happening on Thursdays at 4:15pm EST in the ShadowTrader chatroom. Last week's show is archived here.

Feel free to send any pairs trading questions to pairstrader@shadowtrader.net

Each week Peter and his minions scour the markets to find the best equity and forex setups for the subscribers of the Swing Trader and FX Trader. Premium subscribers get 2-5 of these daily. Every weekend we present one trade idea from either the equity or the forex side here. Note: Free weekly trade ideas are strictly DIY (do it yourself!) and are not actively managed or updated once presented and may or may not be stocks that are currently in play in our newsletters. For a more "full service" feel, with real-time email alerts and updates, please check out the ShadowTraderPro Swing Trader and ShadowTraderPro FX Trader.

Diamonds Trust (DIA) - Short??

Entry - n/a
Stop - n/a
Target - n/a

The Free Trade Idea of the Week is not really a specific idea but rather something you should be watching and has the potential to turn into a rather large trade to the downside if the pattern follows through.

The DIA chart above is a chart of the ETF that tracks the Dow. The two trendlines on the chart are forming what is known as an "ascending wedge". This is a common pattern at many market tops and often precedes very large moves downward as lots of bulls are trapped as the wedge tightens and shows all signs of upside breakout which does not materialize.

Action in the markets as of late seems to possibluy setting up for this sort of move. As shown in the graph above, recent attemts at new highs in the broad market have been constantly rebuffed by bears, creating a consolidation of sorts at these highs for the year. Although the chart above is small and not the greatest resolution, look at the dailies of the DIA (and SPY as well) on larger charts and connect the lows and recent highs to see the tightening wedge forming. As with all trading from technical analysis, remember that a valid signal must be given before entering the trade. In this case the signal would be a break down below the lower trendline, preferably after the pattern has fully formed, ie: the wedge has tightened all the way to a point where the two lines actually converge. If this setup comes together over the next few trading days, we could have an epic short setup in the markets.

ShadowTrader on Your Money Matters Radio - Peter Reznicek of ShadowTrader recently wrapped up a second appearance with Marc Pearlman on Your Money Matters Radio. Click here to listen.

Twitter & Facebook - Over 2,000 of the faithful are now following ShadowTrader on Twitter! Click here to get our tweets. Don't worry, all market related info only. We know you don't care what we had for lunch! ShadowTrader is also on FaceBook here.

ShadowTraderPro Pairs Hour with Peter Reznicek - Thursday's, Peter Reznicek is hosting a 1 hour program on the basics of pairs trading. Tune into the ShadowTrader chatroom under the Support/Chat tab on your platform at 4:15pm EST.

ShadowTraderPro FX Hour with Blake - Back by popular demand, ShadowTrader.net has relaunched the ShadowTrader FX Hour with our newly appointed currency maven, Blake Young. Tune in live, every Tuesday at 4:15pm EST as Blake chops up the Forex market and tells you what you should do with those moldy, old Euro notes you found in your backpack from that trip to Amsterdam! The show is live on thinkorswim platform under the support/chat tab. Click on chatrooms, then ShadowTrader, then click 'Listen' and 'Watch'. See you there!