Ian Woodward’s Investing Blog

It is just under two weeks ago that my last blog suggested we had a Fledgling White Swan but the Bears were Hungry and Prowling:

Now the Fledgling has once again turned into a White Swan and the Bears are Hibernating:

Last week I gave you two scenarios for the up and down cases.  As it turned out we took the high road, so let’s learn from that while it is still fresh in our minds.  The Cup and Handle with the 405 Freeway works often.  However, the next hue and cry will be at a “Double Top”, which is only one more “leg” up (20 to 25 points on the S&P 500).  The jolly old VIX is broken at long last, but the Bears will surely come out growling on the overbought scenario.  The nine golden “XL-” ETF’s are all in nose bleed territory with respect to %B which confirms that point.  However, after a pause to refresh, the market could confound us all and go higher.  If the Double Top case holds,  it could trudge on down and all the Bears will be happy that we peaked.  But then the question is “Do we have an Intermediate Correction or just a Minor Correction?”  One step at a time.  

So let’s turn to our favorite chart which compares the action of the VIX and the S&P 500 over the last three weeks and see what the targets are for next week.  Those who appreciate my approach know one never falls in love with a single scenario, so I have three; i.e., Up, Down or Sideways. 

Based on the recent slopes of the movement of the VIX and S&P 500 it is not difficult to arrive at three targets for the scenarios next week as shown on the chart.

Net-net, the momentum is up, the Bulls have control with the strong Eureka on Friday, and the Market is Overbought using all Internal Factors including the Sector ETFs which are all pressing the Upper Bollinger Band:

There is a lot of excitement in the camp with the recent update to the HGSI Software, which now contains a substantial amount of Data and information on the Connors Style of Investing with ETF’s for short-term traders.  Our own Dave Steckler gives us chapter and verse on these concepts on his daily blog, and there is therefore a flurry of interest.  Ron Brown, my associate and good friend has provided a couple of Movies that also explain all the new goodies.

The longer term Type 3 and 4 Investors’ have probably taken a look at it and said “What’s in it for me?”  So to whet your appetite, sign up for the Seminar on March 27 to 29 and I will leave you with a teaser which will show you two scenarios for either the Type 1 & 2’s or the Type 3 & 4’s.  So hurry, hurry, hurry and sign up if you want to learn how to use HGSI for ferreting for ETFs using the Woodward and Brown Approach:

Best regards, Ian.

This last couple of weeks has been a “turn-up for the books” in that the Bears had the Stock Market in its teeth when the Greek Economy situation blew up in the Euro’s face and the Dollar has been gushing forth in no uncertain terms.  Likewise the Fed raised the discount rate to everybody’s surprise but the Stock Market brushed that aside, and we have recovered 61% of the drop we had a few weeks ago.  Net-net, we have a Fledgling, albeit shaky White Swan but make no mistake the Bears are Hungry and Prowling.

The net result is that we have had a little over a -9% Correction in the S&P 500, but have recovered to the 1109 mark and is now sitting with a Head and Shoulders pattern.  The Saw Tooth Game Plan which has served us royally for these past 11 months is back in full swing so the bottom line is that we either drive back up to the high at 1150 or fall back to re-test the low at 1040 for a double bottom to start with.

Continuing the theme of the VIX vs the S&P 500 which you seem to enjoy, the Bears had driven the fear factor back up to its customary 30 level with a 10 point swing up in two days for two separate occasions, but could not drive the nail in the coffin of the rally when it was on the ropes.  The Bulls have trundled back in a tepid sort of way, but when all is said and done the Market seems to have weathered the storm for now and they are intent on driving back to the recent high at 1150.  We shall see what transpires in the coming weeks.

We came within a hair’s breadth of a Bingo signal…Oh! so you have forgotten about the Bingo!  A Bingo is an RSI 19 with a reading of 33.50 on the NYSE, which can signify one of two conditions:

1. It either signifies that we have reached an oversold situation in the course of a correction particularly if it is followed by the ever faithful Eureka which says the Bulls are buying with some exuberance, and better yet when we have two Eurekas within a week which says “Loud Cheers, we have irrational exuberance to the upside”, or

2.  It signifies the first of many more Bingo signals and therefore corrections to come which kills the rally, and drives the Market into a deeper Intermediate Correction; certainly at least to retest the recent low for a double bottom, or worse yet to finish up with a sizable correction of 12% or more.

You will note that the 200-dma is conveniently providing support at 1029 on the S&P 500 at this time so should there be more trouble to come, that is the last vestige of support for the Bulls before the rot sets in.  You can also see that the current reading of the RSI-19 Period is at 53.30 so we have a cushion with ample warning before we hit a Bingo at 33.50.

As I mentioned earlier the problems with the so-called PIIGS Economies (Portugal, Ireland, Italy, Greece and Spain) threw a monkey wrench into the equation and as you can see the Dollar which had been weak for so long throughout the Stock Market rally, bottomed, and took off these last several weeks as shown below:

Meanwhile back at the Ranch, the bulk of the earnings reports are out and despite the decent Quarterly Gains in most of the stocks, the likes of the Technolgies and the Big Banks were hit severely.  I gave you a worthwhile Surrogate for the market a few blogs ago with the five old Silverbacks of AAPL, AMZN, BIDU, GOOG and RIMM, and the five Big Banks of BAC, GS, JPM, MS, and WFC, and I show below the composite picture of these ten stocks which like the stock market have done nothing since mid-September.

Looking at the ugliness of that chart pattern would scare the pants off any Bull, but take heart, beauty is in the eyes of the beholder.  It is essential for me to give a balanced view so there are two obvious scenarios if you stare at the chart:

1.  The Index has retraced 61% back up and will turn down again to re-test its lows yet again.  The disappointment is that there has not been sufficient strength shown by way of the so-called Follow Through Day (FTD).  It is at the Upper Bollinger Band and must hold there or it is vulnerable to breaking down through the 50-dma one more time, therefore killing any of the promising fledgling rally.

2.  The Chart shows that this Index has Double Bottomed, the 4-dma is up through the 9, the 17 and 50-dma showing strength; more importantly, the 9-dma is up through the 17-dma and the Index itself is above the 50-dma.  Also note that all of this has happened because of the recent Eureka which fired four days ago.  It is poised at the down-trend-line from its highs, aka the famous 405 Freeway, and with one more Eureka it could drive up at least to reach the old high.  As my good friend Dave Baratto has reminded me recently, we need to think of the basics we learned so well in the Days of Wine and Roses, and this paragraph and picture says it all.  But then again, as my other good friend Aloha Mike Scott also attests to the Saturday Meeting findings where we concluded that there was mighty slim pickings of decent stocks, other than “Junk off the Bottom” (JOB) with great last two quarter earnings credentials, and beaten down recent warriors echoing the likes of the senior beasts I show you above.  You might take a leaf out of the White Goose’s book and watch AFLAC!  Good credentials.

So it is a puzzlement and we shall see what we shall see this coming week.  In any event, the Long Term Buy and Hold Type 4 Investors can take comfort from the fact that the Long-Term chart has held and turned up from the support area that I have preached should be watched intently:

Last but by no means least, the one internal that was hanging on by a thread was the % of stocks above the 200-dma which had fallen below 70%, but has recently risen back to a respectable 80%.

These are difficult times to invest with the INTRA-DAY skittishness that abounds with all the indexes.  Keep your powder dry and come to the seminar in 5 weeks time where you learn a whole new set of good stuff to keep you on the right side of the market, both short and long term!

Best regards, Ian.

Just when the Bears had the Bulls on the ropes, up pop the Greek Gods to smile down on the Bulls and stop the rot that could have set in.  That does not mean that the danger of a further drop has evaporated, but until the problems with the various Eureopean Economies are settled including Portugal, Italy, Ireland, Greece and Spain there will be unsettled markets across the globe.

The Bull and Bear fight for turf can be summarized as follows:

1.  After a downturn from the high of close to 8%, the Market bounced for two days with a very tepid dead-cat bounce as I described in my last blog.

2.  This gave the Bears confidence that the 11 month rally had stalled and it was time to look to the short side and nibble at the QID, SDS, and other similar ETF’s.

3.  Having shot the VIX upto the famous 30 mark where we reached recent crossroads, low and behold the Euro/Dollar situation turned around with rumors that the Germans would bailout or at any rate assist the Greek Government with its Economic woes. 

4.  This led to a strong bounce today at the onset, with a precipitous drop in the dollar and resulted in a new relief rally for the Bulls who were literally on the ropes.

5.  As I show in the attached chart, the Bears still have the upper hand and we must wait to see what transpires these next three days with the long weekend ahead of us. 

6.  Despite the decent rebound today, the Bulls must show courage to drive the S&P 500 Index to at least the 1100 mark, and that is only the beginning in trying to recover the internals of the Market which are now badly oversold on most fronts.

7.  The gauge of the Fear Factor would seem to be that the VIX must subside to below 23 before there would be short covering by the Bears, who have the ball at present. 

8.  The QID has risen from the ashes and is stirring slowly; it had a set back today:

I trust you are all using the wc chart to spy the rotation that is taking place and what better way to see it than to look at the QID (and SDS, which have identical patterns):

If the market continues to go down, the winky winky is not to forget to watch out for a Bingo to see some form of Capitulation.  In a Market Rally with a Minor Correction you will watch for a single Bingo followed very quickly by an Eureka (or the more the merrier) for a renewal of the rally.  However, in an Intermediate or Major Correction, expect several Bingos and Phoenix before there is exhaustion to the downside.  We came within a hair’s breadth of a Bingo yesterday on the NYSE, until the RSI 19 was driven back to over 40.5 today…so no cigar. 

Remember that the -8% mark is at 1058 & -10% is at 1040 for the S&P 500. 

Now you all know what to look for until I write the Newsletter this weekend!

Best Regards, Ian.

It had to happen sooner or later - the Bears had a field day today and clobbered the Market Indexes.  This could well be the end of the 11 month rally, but we will have to see what tomorrow brings. 

 The S&P 500 finished at 1063.11 and is only a meager 5 points away from an 8% Correction.  Assuming we drop below that tomorrow, the next target is 10% which would take us down to 1040.  A decent clean out has been expected for months, and the Bears have waited patiently for the true signs that they have the upper hand. 

We have gained a lot of useful information regarding the behavior of the VIX and the S&P 500.  A simple rule of thumb is a “VIX Fear” factor of 5 points up/day, with 30 points down/Day on the S&P 500…between friends.  Here is the follow-up picture to the one I posted yesterday, and those yardsticks were confirmed again today:

It goes without saying that with the expectation of a poor jobs report tomorrow that the market should drop even further, and tomorrow’s action could speak volumes of what to expect in the immediate future. 

1.  The Bulls hold the line at somewhere between 1040 and 1058, or

2.  There is a rout by the Bears to drive the floodgates to a deluge of 30 or so on the VIX

In which case we can expect a further 30 point drop if these benchmarks are to confirm their value. This would imply that both lines in the sand shown above are broken for the weekend and next week’s action will prove crucial for the Stock Market. 

Shorts have at it with much fun, and Longs wait patiently to see how deep the carnage is or whether this was a decent clean out and a revival of the rally.  All the measuring rods will be out in full force this weekend by the various gurus of Elliott Wave, Fibonacci, etc, but keep your powder dry until the dust settles.  I feel sure the internals of the Market which I faithfully give you are all broken, so take your cue from that fact as there will be much repair needed after today’s numbers are digested.  Just look back a few blog notes to refresh your memory, and you will see the warning signs I gave you.

Best Regards, Ian.

Here is a sequel to the last blog where I discussed Bounce Plays.  The thought struck me that I should show you the relationship of the VIX to the S&P 500 over the last ten days or so.  My new good friend Billy from Belgium planted the idea in my mind with his recent work, and I felt I might build on that to harness the near term parameters for defining a Dead Cat Bounce vs. a fully fledged Bounce Play.  As my other good friend Dave Steckler said “we will know in the fullness of time”, but I hope you will enjoy this short note, with no offense intended for Cat Lovers:

 The next chart needs no explanation, but as you can see there is tremendous symmetry in the relationship between the VIX and the S&P 500, so it seems to me that it is an easy call to make on the demarcation of where the Bulls and Bears are winning the tug-o-war.  We are sitting at around 1103 at the moment and with any luck another 12 points are on the cards to get to that stubborn line @1115. 

I suspect that given the general mood and bias to the downside that a Dead-Cat Bounce will peter out at 1115 and produces no Cigar!  The Bears are itching to short, but waiting patiently for the first sign of weakness after this two day rally. 

The Bull’s Challenge:

1.  Drive the short-term rally as far as they can towards 1145, and anything short of close to that will be the signal for the Bears to have at it.

2.  On the downside they must hold 1070…the recent low, or we will see the famous 8% down where 77% of all S&P 500 corrections turn back, or we head on down to 1040 which is 10% down.  After that it is anyone’s guess.

The Bear’s Challenge:

1.  Hold the fort at above 18 on the VIX and I would be surprised if it will get much below 20 even with a move to S&P 500 of 1115.

2.  Drive with “Bear fear” of 5 or more points per day on the VIX and break above 24ish for the real floodgates to open. That could take the VIX to 30 which is where most recent moves are turned back unless the floodgates turn into a deluge.

So now you have the simple game plan for the foreseeable future.  The March Seminar is now less than eight weeks away and it is time you signed up to get a seat.  We will be back at the Library, so as usual we can take 55 people with first come first served. 

Best Regards, Ian.

As my good friend Mike Scott said to me;  “Let you know in a couple of days or a few weeks”.  The supposed bounce this past week never materialized, despite the good news of a 5% growth in GDP, and the relatively good Earnings Reports including the Tech Stocks which took a beating.

The Sandstorm blew last week in favor of the Bears and the tepid bounce was hardly even a Dead Cat Bounce.  So you will notice that I have lowered the target for a deadcat bounce to 1100.  Note that drops of 15 points per day on the S&P 500 have taken us down to 1074 and we are but another 16 points away from the Big Line in the Sand of 8% down, i.e., 1058.  So we could see that this coming week.

More importantly the mood is now somber all around.  I’m not telling you anything you don’t know already, but it will take a major turnaround of events to instill some life back into this rally.  We have only to look at the key internals we watch to see that a lot of damage has been done since the S&P 500 reached its peak of 1150 just 9 trading days ago.  The next four slides are well known to you so here they are in quick succession:

Now I come to a new beast, which my good friend Bill Roberts and I are working on.  The challenge was to see if we could give insight into how red was red and how green was green on Bongo Daily and Bongo Weekly.  This is work in progress but it might open your eyes that we are onto something. 

I will show you a snapshot of Bongo Daily to whet your appetite.  As you well know we use RSI 8, 14 and 19 ema as the basic crossovers to establish a trigger of Bongo Up or Down, and we struck on the idea of looking at the actual components of 8 up or down through the 14, and 14 up or down through the 19.  These are depicted by red and green, respectively in the chart below.  The demarcation line is “1.00″ as shown by the dotted horizontal red line.  The higher the two lines are up from the dotted line at 1.00, the stronger is Bongo Daily and vice versa.  So we are in the dumpster at the moment!

So I summarize again by saying there are two scenarios:  A Double Dip before a strong bounce outlined in Blue or a single dip and a quick return to recovery.  I sense the former is more likely!  I don’t think I am mistaken that there is a change in psychology that has taken place these last couple of weeks as good news is being ignored and negative news carries more weight.

Best Regards, Ian.

Last week was a bad week for the Stock Market - it has the Heebie-Jeebies, i.e, the Jitters are very apparent and of 2008 proportions with a 500 point drop in the DOW.   This week can add fuel to the demise of the 10 month rally we have enjoyed since March 2009 or give us a renewed boost to the rally.  It stands to reason that Politics more so than Earnings will be front and center as we look forward to the vote on the Fed Chairman, Ben Bernanke, and the State of the Union Address by President Obama on Wednesday.  The REACTION by Wall Street to both may seal the fate of the rally and bring about the Intermediate Correction that so many have touted for so long, or find a fresh move to the upside to continue the rally and keep the Golden Cross alive.

The Internet seemed to enjoy the Custer’s Last Stand blog note last week as I laid out the simple process steps that would cause Long Term Buy and Hold Investors pause for concern.  Sad to say the resulting action happened inside three days flat with successive %B 1-Day Down Kahunas driving it down through the Bandwidth to finish with a negative reading of - 0.27, a number not seen since the Gloom and Doom days of 2008 and early 2009.  Here is the updated chart:

As a result, the Playing Field for the Ball Game next week has shifted heavily in the Bear’s favor.  The chart below shows the various Lines in the Sand for either a reasonable Bounce Play back above Custer’s Last Stand and beyond, a Dead Cat Bounce to the obvious resistance at 1115; this would then lead to a Bear Feast of a Minor Correction of -8%, or something deeper that would end in an Intermediate Correction of -10% or worse.

It hardly seems that six months have gone by since I first discussed the Golden Cross in the July 19th 2009 Blog Note, but I felt it worth showing you the progress that the Stock Market Rally has made since then to cheer you up!  You will note that the results have been every bit to the High Side relative to past history, and projecting its progress for the next six months to mid-2010 would put the S&P 500 at around 1250.  The alternative is a downside swing which could lead to a Black Cross where the 50-dma crosses down once again through the 200-dma at an estimate of about 1025. Here are the results:

Next week should be an interesting week one way or another.

Best Regards, Ian.

I gave you a Game Plan for Type 3 Swing Traders in my last blog, and that seems to have shown you the correct Playing Field as we ying-yanged back and forth between the upper boundaries I showed.

Sad to say that as I write this we are now down to Custer’s last Stand, so the Swing Traders know exactly what to do.

The Optimistic View:  Now we come to the Type 4 Buy and Hold Types who want to stay a while longer if only this market doesn’t run out of steam.  Having reached 1150ish on the S&P 500 and 2326 for the Nasdaq, the upper boundary next targets are 1200 and 2400, respectively:

We come now to the present and here is the Chart that alll Type 4’s are following:

Since the 2009 rally has had an uncanny similarity to that of 2003, we can emulate a possible correction where I have “stuck” the next six months on the Right Hand Side to emulate 2004 in 2010 as one possible scenario:

Now we come to the Game Plan for all who value what they have in their 401-K:

…And here is the current status, with three legs done and two to go.

I’ll give you one last winky-winky…If %B comes down to -0.20 or greater, run for the hills!

Best Regards, Ian.

I am in the middle of feverishly writing the Newsletter due at the end of the week, but felt I could give you a Heads-Up to summarize the Stock Market Short-term Game Plan:

My good friend Chris Wilson is a Guru at Point and Figure Charting, so I think he will get a kick out of this simple chart which I hope says it all for a Short Term Game Plan:

Best Regards, Ian.

In my e-mail bag, I had a good friend Bill Jagoe who attends our seminars, ask a series of questions regarding exit and entry for Type 4 Buy and Hold Investors, so here is my detailed response to him:

In the weeks and months to come, I hope this blog note will serve all Type 4 Buy and Hold Investors by helping them stay on the right side of the Market, just as earlier blog notes did when it was time to exit back in 2007 and 2008, and then come back in 2009.

Question:  Could someone tell me how Type 4 investors should use Ian’s Mark Pharr Chart view?

Ah Bill…I sense the Type 4 Buy and Hold Investors are getting a trifle fidgety and want to have their ducks lined up for a proper exit!  You are in luck, as not only will I cover the Mark Pharr Chart but also the Bill Jagoe Chart as I will elevate you to the peerage in the History of Using Bollinger Bands (BB’s) for Type 4’s.  Here is a full explanation as promised in my bb note to you.

Let’s first put the Mark Pharr chart in context…in a similar vein to when Mark asked back in 2007 for a simple game plan to help him get out of the market at the right time.  I gave him five simple steps of expectations:

1.  A Large drop in %B of the BB’s of > -0.24, at least a small Kahuna down.  It happened.
2.  A drop below a reading of 0.60 in %B…it happened.
3.  A hold at a %B of 0.3 or it dies.  It died.
4.  The %B breaks down through the Bandwidth.  It did.
5.  An ultimate drop of >10%.  We wish it was only 10%, but that was the first drop back in 2007-08.

I am pleased to say that he took my suggestions and got out long before there was major damage.  Below I show one of the charts I used together with other references, which those of you who attended any seminars since March of 2007 can find on your Seminar CD, or on the March 18, 2008 Blog Note:

As a summary of how Type 4 Investors have stayed on the right side of the market since then, here is what transpired after the Black Swan Caper, a disaster we would not wish to live through again:

The HGSI Software has given us substantially more visibility since then and here is an updated view of a chart that used both a very long term 89 Periods along with the 40 Period as shown below.  Note I have added the famous Ribbons of Green and Red, which you will be able to use with fast response once the next release is out…which will be very soon.  For now, it doesn’t take a minute to visually see the “Days of Wine and Roses” in 2003 to early 2004 which is highlighted in the green dotted frame, just as we have right now, with the points of entry back then and more recently in July of 2009.

1.  ALWAYS, I repeat ALWAYS, trust %B going up or coming down through the Bandwidth as your PRIME Target for when to enter or exit.  Note that on a 40 Period Weekly chart the %B is currently at 0.8937 and the Bandwidth is at 0.3923, so at this time you have plenty of cushion before the %B comes down through the Bandwidth.

2. The second Golden Rule is that 77% of the time over 50 Years, the S&P 500 has corrected <8%; it is 70% for the Nasdaq.  So as a Type 4 Investor if you are prepared to take a chance that you have roughly 3 chances out of 4 that you will not lose more than 8%, then that is the second trigger.  More than that and you kiss it goodbye.  Otherwise you know the rest of the sad story having been through 2000-03 and 2007-2009, along with the rest of us.  It hurts when you lose an Intermediate Correction of 12% to 16%, and worse yet, a Bear Market Correction of >20%.  Your own Portfolio will be substantially worse than these numbers!

3. The advance warning for both of the above to occur is that BONGO WEEKLY will turn Red…thanks to the team of five HGSI Users who did stalwart work on the Bongo Indicators.  Bongo Weekly is slow to turn, so remember it is a godsend for Type 4 Investors, who are reluctant to be jack-in-the-box Investors and are prepared to give up some of their Profits until their stomachs can’t stand it any more!  However, given that the two patterns are similar at this stage of events, it would pay for Type 1, 2 and 3’s to also watch for a heads up on the Weekly Bongo turning Red, as that is a significant event that should not be taken lightly.

4.  By then, all the Ribbons on the “wc chart” will be blood red, and you will be sporting a score of -5 or worse, especially if we have a sharp jolt with a Phoenix and Red Kahuna down (> -0.40).

5.  The Slow Stochastics shown on that View will break 80 and then 60 in a hurry. It is currently at 99.55…highest yet in six years.  However, note how it stays up for very long periods and it takes a lot of deterioration on all the other items before it snaps.

6.  Wilder RSI will break 50 to the downside. It is currently at 58.32 with the Nasdaq Weekly view.

7.  I promised you a Bill Jagoe Chart which will elevate you to the peerage along with Mark Pharr in the annals of using Bollinger Bands.  After much soul searching, the problem we have with the current long term BB’s of 40 and 89 Periods is the “Black Swan Caper”, rendering it too loose to give sufficient warning EARLY enough, should things go south in a hurry.  So, I offer you the 40 and 20 Period BB’s which bring both the Middle Band of the 40 Period and the Lower Band of the 20 Period together and that coupled with the Nasdaq crossing down through them would suggest the party is over…at least for a 10% correction if not more.  These are currently at 1966 and 1981 with the Nasdaq Index at 2269 on a Weekly Chart, while the Middle Band for the 20 Period is at 2132.

By now you know my process well enough that I’m NOT Saying this WILL Happen, but it MUST Happen to Exit.  The Red dot is when the Nasdaq crosses over both the 40 Period Middle Band and the 20 Period Lower Band by using the old trick I have taught you to overlay past history from 2004 on the current chart as shown in the next two slides!

a.  Given the natural tendency for Bulls and Bears to always hold or break at even numbers, the battle will be first fought at 2200 which is only 3% below the current Close.

b.  If that is broken, expect the next battle at 2132, which is 6% down.

c.  The last resort will be around 2000, or essentially 12% down.

Obviously in the scheme of things, the first two targets are tolerable to a a Long Term Type 4 Investor, and I am sure they will start to scratch their heads at 2100, which is 7.5% down.  The rest depends on individual stomachs for Risk/Reward tolerance and proper Money Management.

Lastly, I have focused on the downside scenarios.  However, as we well know, the other two scenarios are sideways or up, and we shall have to wait and see what the New Year and the Earnings Reports bring.   Once again here is my New Year’s wish for all of you:

Best Regards, Ian.