Ian Woodward’s Investing Blog

We are at the crossroads on this Bear Market Rally.  We may be pausing to refresh but there are underlying signs of instability on the general “feel” right now.  A good friend of ours, Dave Steckler, gave the HighGrowthStock Investors (HGSI) a picture which sums up the roller coaster action that Day Traders are experiencing:

To confirm that things are in the balance at this point are three other factors that give Early Warning Signs to be on the look out for problems which I keep a beady eye on.  They are summed up by the S&P 500 stalling for this past week at the Double Top I mentioned yesterday at 875.  In addition the VIX has gradually been creeping up from a low below 34 to close to 39 these past few days, and the overall QID/QLD Bull and Bear Momentum Indicator is drooping.

Here they are for you to digest in quick succession as the explanations are on the charts:

We have the potential for a very volatile week with both good and bad news.  Wednesday has two big ticket items…the 100 day Presidential reign which should be a positive event, and the release of the GDP.  Numbers are as drastic as a 7% drop while a few see a drop of only 3%.  If it is a big number that would give cause for concern to the downside, but if it is less than expected, the “green shoot” optimists may try to push the rally into overdrive which can help regain the momentum to the upside.  It goes without saying that the swine flu potential epidemic is also troubling, but seems to be contained for now.  Be aware we are still on a rally until further notice.  This note is to alert you to be on your toes.

Best Regards, Ian.

Sometimes the Stock Market can do funny things to the best of Technicians, especially when it is so skittish and entirely event driven.   There seems to be a temporary air of good feeling which is taking earnings in its stride, as corporate America so far has cleared the low bar set by Wall Street.  Also, after falling at a 6.3% annualized pace in the fourth quarter, a 5.1% decline for first-quarter GDP was the median forecast of economists surveyed.  “Despite the massive contraction in the economy, the expected composition of first-quarter GDP should show encouraging signs,” wrote economists for Credit Suisse.

It would seem we need a new definition of a Wedge, and should take a leaf out of the Surfer’s book.

The Wedge is a combination of two waves that merge together, thrusting into a titanic slingshot that breaks with enough pounds per square inch to send an Iron Man to the mat.  The Bulls are hoping for such a sling shot that will swing for the fences with at least a 41% Bear Market Rally from the low to take it to the illusive target 940 level we have talked about – the “Higher” Target.  However, before the Bulls get too carried away, there is the little problem of a double top just above Friday’s close that the Market must get above at 875.  Otherwise the pundits will be saying all is not lost for the Bears and the Market is headed for a correction should it not get past that number with authority.

The intra-day Type 1 and 2 Traders are scratching their head as they have to contend with awful zigzags as the market heaves, bends and pulverizes even the intra-day players:

So given all of that, here is an Updated “Ideal” Road Map which shows the alternative Targets which have come into focus.

The three immediate Targets for the Bulls are:

1.  Get past the Double Top at 875
2.  Drive for the reasonable follow-up to 900
3.  Then Swing for the Fences at 940, 41% up from the Base Low of 667.

The downside looks better and better with every notch higher.  It goes without saying that the Bears lick their chops the higher the market goes, but meanwhile the early birds are having to cover their shorts. 

1.  The most important psychological Target is to stay above 800, almost an 8% cushion.  That would bode well for a continuation of the current rally as the pundits will jabber about an Inverse Head and Shoulders set up for the next leg.
2.  After that, anything between 780 and 800 would be disappointing but at least gives hope.
3.  If the market breaks 780 we head down into the Abyss one more time.

Best Regards, Ian.

The back and forth by the Bulls and Bears is certainly interesting.  Yesterday we had a 4% down day and today we bounced back over 2%.  So the Pirates of Penzance were foiled this time but they will be back soon.

The reason I say that is that every technician has latched onto the rising wedge syndrome, a sure sign that the Market is overbought and over-reaching:

Now that we had an Eureka today to counter the Phoenix of yesterday, the Bulls are still in a tenuous control, and can resume their efforts to drive for the next logical step of 900. Alternatively, Bears come roaring back and break the trend by driving the S&P 500 to the last line in the sand at 780 before there is the likelihood of further capitulation and deterioration of the 401-K’s around the country.

The cushion we now have on the downside is 8% and 14% to and from the Line in the Sand at 780 as shown below.  I cannot lay out the Game Plan any simpler:

What then is the Dark Cloud over the Market?  The Health of the S&P 500 Earnings Reports.
I laid the problem out at the Seminar and it doesn’t take any explanation.  The Pessimists
say we cannot support more than 400 to 600 on the S&P 500 – the gloom and doom scenario.
We may not get out of this problem for at least another two quarters.

Meanwhile the 1937-38 Scenario is still intact for those who got the Woodward and Brown
Scenario, so keep your fingers crossed.

Best Regards, Ian.

We have enjoyed a Bear Market Rally for 49 calendar days since the last big
down day when we had the last Phoenix signal, and we reached the High
Target of 875 as I suggested in my last couple of blog notes. As one would
expect with a -4% down day on the S&P 500, we had another Phoenix signal
today along with a small Kahuna.  This suggests that the Rally may be over
for now, but one down day does not establish a confirmed change in direction.

Unfortunately the S&P 500 broke 840 which was a critical line in the sand on
the way up, but as I have said in previous notes the cushion we have is 8%,
so we have used up half of the reserve we had to preserve the Game Plan
of Higher Highs and Higher Lows.  That will truly be broken when we reach
below 780, and those type 3 swing trader’s who nibbled should certainly have
taken some action to lighten up and preserve capital by then:

I’m sure most of you will recall a similar chart I provided four months ago
showing the critical lines in the sand.  The message is that we are back to
square one.  However, I am sure you will find that your 401-K is less now than
then, so this should be a lesson in Money Management that if we break 780
again, you are playing snakes and ladders with your hard earned money.

All is not gloom and doom as yet…after all we have had only one bad day, and
the following chart gives you the perspective.  As you can see we show a
Phoenix and a Little Kahuna to the downside based on today’s action, and the
S&P 500 Index is sitting right at the 100-dma and 17-dma averages for support.

If it breaks that support in follow through action, we head down for the 50-dma
blue line as shown on the chart.  The challenge for the Bulls is to stop the
bleeding and hopefully produce an Inverse head and shoulders pattern that
then gives a chance for another run up on the Bear Market Rally.  This week’s
action should unfold where we stand for the future health of this rally.

Best regards, Ian.

I know in this day and age, people are in a hurry and don’t remember to read the comments section at the bottom of each blog note.  Kevin (all the way from the Middle East) wrote a great reminder to me and although I have answered him there, I felt it important to put it here as well to ensure there is no misinterpretation or over optimism on my part in your minds.  In my hurry to not be redundant with the information in the Newsletter, I didn’t give full treatment to the downside scenario, so here it is:

Kevin Says:

Ian,

Thanks for the timely post. So you are not concerned about the volume falling off or the slope of the price line starting to flatten out? Of course, if I stare hard enough, I can see the 50 DMA has just turned up…, but we are a long way from penetrating the long-term DTL.

Hi Kevin:  Sure, we must always be concerned when a rally is a trifle long in the tooth, and it begins to curl over with volume drying up.  The Newsletter covered all the bases on three different scenarios, so I did not want to be redundant on the “if’s, and’s and but’s”.

But then again all great climbers must pause to refresh, so that a little droopiness is sometimes good before a rally gets a second wind.  Please also realize that last week was a short week with many taking a well deserved holiday in Hawaii or the Hamptons. 

Maybe I should have spent more time on the downside to give a balanced view on where my head is at.  I did that in the Newsletter.  So here it is:

The way to look at the situation is that any point higher than we are at now is gravy, and provides more assurance that we can withstand greater than an 8% correction the higher we go.  My sites are only on the “High Target” as I mentioned on the bottom of the chart, so that 875 only gets us to 31% up from the Base Low, which is hardly reaching for the fences as the other two targets suggest.  It is most unlikely that the DTL 405 Freeway Line which is the Highest Target of over 1000 will be reached on this round without a correction.  However, keep 940 and 1000 in mind for later challenges.

The more important point is what is the ultimate extent of the cushion on the way down, and can it portend to produce an INVERSE Head and Shoulders when all is said and done to set us up for the second true leg of the move back to recovery?  If this rally peters out today, the best we can hope for is to arrest the drop to 8% down to maintain an intact Saw Tooth Plan.

One last point in the scheme of things is the question of defining psychological barriers:

a. 800 on the S&P is #1. We need 875 to hold an 8% drop above that.
b. 8% down is #2, which is the 77% rule of all S&P 500 corrections.
c. 780 is #3 to hold the Saw Tooth alive and to give any hope of an Inverse Head and Shoulders set up for the future.  All the talking heads will be covering that point if and when it arrives.

After that, throw in the towel and run for the hills.

Best Regards, Ian.

Despite the gloom and doom we experienced just 6 weeks ago, we have been able to crawl out of a hole slowly but surely to gain over 30% from the Base Low of 667 on the S&P 500.  This is indeed a comforting cushion should we go down in the ensuing correction which is expected to arrive soon if not sooner.   This Bear Market Rally has Centipede Legs as we hop along on our Pogo Sticks:

1.  We are into 2nd qtr. Earnings Reporting, and that invariably dictates a sell off

2.  We are two weeks away from May, which suggests the adage “Go Away in May”

3.  We are in a six week rally and the best  is 8 weeks on the way down from the top

On the other hand all the palaver of the G20 summit is behind us and we experienced five straight weeks of S&P 500 gains, where I last showed you the statistics for  the first four weeks with over 23% up and 27 such occasions over the years since 1929.  Yes, of course it was somewhat with tongue in cheek, but we needed some positive news against all the gloom and doom around us, and as it happened it turned out to be favorable…who says that History doesn’t repeat itself?

Given that we then eked out a fifth week of gains, I might as well continue the theme and show you what Past History might suggest for the following three weeks.  Note that the chart below has its stake in the ground at four weeks and then showed the next week and four weeks later, so that we now have only three weeks more to go to meet the expected range of numbers I have circled in the chart below:

Now to blend Theory with Practice, we should stare at the current Support and Resistance lines that most Technicians would lay on the current S&P 500 chart pattern.  I have long before now made the point that 840, 940 and 1000 were the important lines in the sand on the way up.  Since 840 is now behind us, I raised the bar to 875, 940 and 1000 as shown on the chart below:

As I am sure you will recall, all great rallies rise above the 17-dma, and  given that it has pierced up through the 50-dma, when they fail the fallback is to that level.  The Line where key decisions must be made is at 790 but certainly at 780 which was the bottom of the 1st leg of the Saw Tooth Plan.  Net-net, the Market  has played right into our hands and there are no excuses for type 3 swing traders who have been nibbling.   All these numbers are within the ballpark of the Past History Chart above!  Enjoy.

Best Regards, Ian.

After four weeks in a row with the stock market up, the question on our minds is what happens this coming week?

Fortunately I found some statistics that shed light on this question.  Sad to say that the odds based on past history is almost a toss of the coin, as seen by the chart below for those 27 previous occasions where the S&P 500 gained more than 10% in four weeks:

However, we can dig deeper and get a flavor for the boundaries of the move based on
past History and it will be fun to see where we land on this next (fifth) week.

1.  Note that the only two occasions that the S&P gained more than the current 23.28%
over the 4-Week period was in 1932 and 1933 when they rose a humongous 54.20% and 33.85%, respectively.

2.  If you cast your beady eyes down column “C”, you will see there were 13 weeks up
and 14 weeks down…hence the odds of up to down based on history is almost a toss of
the coin or 48:52 to be precise.

3.  But what about the coming week is the big question?  I have separated the positive
and negative weeks into columns “F” and “I”.

4.  Here are the key statistics which I have ringed on the chart:

                                          S&P 500 Current    5th week +ve    5th week -ve
   �
Average S&P 500                     843                       864.33                  827.07

Average % up or down                                           2.53%                  -1.89%

Best & Worst Case S&P 500                                   940.96                  804.05

Best & Worst % up or down                                   11.62%                  -4.62%

The figures would suggest that we will do no worse than dropping to the 50-dma which
is at 790, and a fighting chance to reach the next rung on the ladder at 880 which I
mentioned as the high road scenario in my blog last night.   I have kept the numbers the same as the chart to make for easy reading rather than rounding up.

Best Regards, Ian.     �

The airwaves are full of the fact that this has been the best four week stretch since 1933.  The big question is having delivered over 25% how far can it go?

Since I have been a big QID and QLD Watcher, the factors I have developed to understand the thrust of the Bears and Bulls suggest that the Bears are on their heels for now and have gone a trifle quiet, while the Bulls are flexing their muscles and keeping the ratio of the QID/QLD Total Dollar Volume down to numbers <1.0 and as low as 0.8…not seen before.  So the contrarian view is that the Bears will soon be itching to short.

Better yet, the new beast I have come up with is a decent measure of the thrust of the
rally and as you can see the slope of the rally is still intact.  As long as the red dots stay to
the left of the Yellow Arrow, the rally continues.  if it breaks it significantly to the downside
as it did in May last year, then the rally will be over for now.

Of course, the $64 question is how far can this particular rally go?  Nobody knows, but for
sure we can set yardsticks for what would seem to be reasonable based on past statistics.
The chart below suggests that 17% to 30% are reasonable targets, but that given a major
rally one can aspire to as much as 38% to 50% as seen in the chart.  In this heavily skittish
market that may be a tall order, but realize that the first hurdle has already been
accomplished.

So let’s see what might be reasonable Targets given that the Nasdaq had a breakaway gap
two days ago which bodes well for a continuation of the move…for now.  Now skeptics will
immediately suggest that gaps are usually filled, so of course we must be on our toes that
the tide doesn’t turn sharply, so here are the High, Higher and Highest Roads for the S&P 500 and the Nasdaq, respectively.

On the downside, the areas of support now become straight forward:

1.  The 50-dma for both Indexes at 790 and 1470 for the S&P 500 and Nasdaq, respectively

2.  The critical Lines in the Sand at 741 and 1350, respectively

3.  The final gasp at the Base Low of 667 and 1266, as shown on the charts.  Heaven help us!

It goes without saying that the higher this Rally goes, the more the bears will be itching to
come back with their shorts.  Keep an eye on the VIX.  But more importantly, we must not
forget our pessimistic friends who are saying that the Earnings Reports will be due in full
force in another week for three weeks in a row, and that we will soon be in to May, when
the old adage is “Go away in May” as all will be headed for the Hamptons! 

When all else fails, never forget that >8% down on the S&P 500 is a strong warning that the
gig is up, and it is time to find refuge from the wind in your face!  That number is 776 which
allows for a little break below the 50-dma.

Anyway, we have our beady eyes on the Pessimists who insist we must see a P-E of 10 before we can feel comfortable that a Fresh Bull Rally is underway.  Furthermore, with EPS estimates as low as 40 the gloom and doom scenario suggests we will see the S&P 500 below 600 before we are finished.  I leave you to enjoy the key chart from the March Seminar relating to the Fundamentals, as shown below:

Well there you have it.  I hope those who are attending Dr. Jeffrey Scott’s webinar meeting
tomorrow night will have digested this before the meeting, as this is my contribution to that
event.

Best Regards, Ian.