Ian Woodward's Investing Blog

Change Management is key to HGS Investing

winds

In my previous note I indicated that the Credit Crunch has caused at least three conditions to exacerbate the way one engages this market: 

  1. Extreme Volatility leading to Moment Trading Intra-Day, leave alone Inter-Day

  2. Nervousness for both Bulls and Bears when we are on the verge of a Bear Market

  3. The Market is EVENT driven where every little nuance of news causes perturbation 

I also gave you seven Principles of HGS Investing that provide the foundation to successful Investing and above all Preservation of Capital.  Please read that companion note again to refresh your memory of what I said.  I will now dig a level deeper to address the factors that will state the requirements for the Bulls and the Bears to judge which way the wind is blowing at this stage.     

  • The Requirements for the Bulls: 
    1. The “W” Bottom:  The Nasdaq must hold at 2200 and the S&P 500 at 1270

    2. The 200-dma High Jump (Limbo Bar) is no worse than -11% for these two Indexes

    3. The New Highs must quickly repair to over 150 for several days on the NYSE

    4. The 50-dma flattens at 2500 and 1425 for the Nasdaq and S&P 500 and then slopes up

    5. The 4-dma and the 9-dma get above the 17-dma and then pierces up through the 50-dma

    6. The Nasdaq and S&P 500 breakout above the stiff resistance from the Declining Tops Line at the highs (the 405 Freeway) and 200-dma at 2600 and 1483, respectively

    7. All Indexes return to their Previous Highs and then the question is whether we move on to New High ground or invariably get pushed back at or around a Double Top to start the whole process once again. 

I have news for you…this is unlikely to happen for several weeks from now.  Understand that currently this would be one of the lightest Bear Markets in History, and hence wishful thinking.     nasdaq 

s&p

But I am no soothsayer, so let’s look at the possible Scenario for the Bulls in trying to gain ground back in the to and fro fight with the Bears: 

  • The first snap back rally must be at least 15% up from the Base Low to confirm strength which suggests it needs to get back to 2540 for the Nasdaq as shown in my Blog of Round #3 for the Gunfight at the OK Corral.  Unfortunately, the best it has done so far is 2419, so there must be a bounce to eradicate the effect of these last three strong down days.

  • The retrace must be <50% which puts it at around 2370 where it must hold.  Instead, we are already down to 2279, so the message is it needs to again bounce quickly…like tomorrow.

  • Then a reach for the 200-dma to get above 2600 for a further 20% move…between friends. After all that effort, the Bulls would be sitting above the 200-dma at 2600 faced with all the over head resistance 100 points above it and still be over 250 points from the old high. 

Of course all of this is pure speculation, but if one doesn’t have a Stake in the Ground with which to measure against, then you don’t know how to Manage Change!  I’m not saying this is what will happen, but that this has to happen to have a chance for the Bulls to get themselves out of this mess.  Then ask yourself the chances of it happening and the answer is slim to none UNLESS there is some earth-shattering news by way of a pleasant surprise.  My take is there are very few Bulls with conviction at this point in time to provide a strong rally.  So the conclusion is that some outside powerful surprise EVENT is all they can hang their hat on, and we see from my earlier companion note that may not be on the cards.    

  • The Requirements for the Bears: 
  1. The first Target is to retest the Lows of 2202.54 and 1270.05 on the Nasdaq and S&P500.  The Bears have already got back down over 50% of the way in three days!

  2. The next target is to head down to 2100 and 1225 for a -20% drop from the 200-dma. Anything as low as 20% down from the 200-dma is tantamount to the start of a severe Bear Market, the likes of which we have not seen since March of 2000

  3. The news along the way to these lows will be accompanied by more poor reports on the Economy, the Earnings Reports and the Credit Crunch all wrapped together.

  4. The Banks are reluctant to give loans and until the trust between them improves this problem will be major for the FOMC to overcome. 

  5. New Lows will again start to rise as the next level of casualties gets slaughtered.  New Highs will stay dormant below 50 and more likely below 25.  Both New Highs and New Lows have been down below 20 for the last ten days.

  6. The Global Contagion takes hold and starts with major drops in the Hang Seng and follows through to Europe to then hit the US Markets for more – 200 point days on the DOW.

  7. The Fed is unlikely to reduce Interest Rates before the next FOMC meeting in March, if then given there is now growing concern that Inflation is also a concern within the FOMC members. 

I’ve tried to lay out the two scenarios as fairly as I can, so you be the judge and make your own mind up as to what must happen soon for the Bounce Play to continue up with fervor. My own judgment is that the Bounce must hold here or we are down to test a double bottom and then if it doesn’t hold, the floodgates will open again to the downside for a bigger Bear Market than we have had so far.   Best regards, Ian.

 

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