What is the appropriate fastener length to use for installing cedar shingle siding over insulation?

Assuming local Building Official approval for this type of installation is obtained, you should use the length of nail recommended for that specific material. Add the thickness of the existing insulation and this gives you the nail length required for the fastener to penetrate ¾" or more into the sheathing. Refer to the CSSB's Exterior and Interior Wall Manual.

Do you recommend staining #1 red cedar shingles on all 4 sides before applying as sidewall?

As long as the shingles are dry when stained it doesn't seem to matter whether they are painted on all 4 sides or just on the front side. A local, professional painting expert may be able to provide you with further guidance.

Can I put new cedar shingle siding over my existing cedar shingle siding?

Yes, but most times you need to install additional window and door trim to ensure that the product lies flush with windows and doors. Sometimes this additional trim requirement makes it less expensive to tear off the old siding and start from scratch. Look at the diagram in the CSSB's Exterior and Interior Wall Manual for more details.

How do I create a roof wall drip line intersection?

Put the bottom step flashing on the starter course, then bend the bottom of the step flashing out about 1" to 1 ½" away from the wall. The top of the step flashing is still under the siding or plaster. You do have to trim the top starter course shingle with a triangle shaped cut to allow this. This does leave a triangular shaped void between the bottom of the step flashing, the wall, and the shingle, that can be filled with caulk. This will divert the water away from the lower wall so the water does not run down the wall.

Can I install grooved shingles with the smooth side exposed?

You can install grooved shingles this way, but it is a rather expensive installation. You have paid more for the grooves put on the face of the shingle, and they are manufactured with the intent of having the grooves facing out, to the weather.