Ian Woodward's Investing Blog

To those who are avid Technical Analysts, this blog note is written with tongue in cheek, so don’t feel that I have taken leave of my senses.  However, there comes a point when there is a fine line between Art and Science.  The proponents of the great Masters of Fibonacci, Gann and Elliott Wave will measure everything from upside down to sideways and back, and of course they are laying down the scenarios for “if this, then that, and maybe something else” in the chess game of what the market is telling us.  However, sometimes trying to look five moves ahead can be detrimental to your psyche, and I always try to KISS it at times like this.  Remember what I have taught you: My world works in threes:  It is green, yellow or red; or it is up, down or sideways….or, you get the point.  Fundamentalists pooh-pooh this stuff as a bunch of rear view mirror mumbo jumbo, and some will even never admit a mistake but leave it to their heirs to find out.  Those who use both F/A and T/A are usually rewarded for their expertise at times like these.

So what’s my point?  It all depends on three things: one’s time horizon, your stomach for risk and reward, and your willingness to act quickly. Alternatively, to be prudent, patient and pounce when the all clear has been signaled.  Types 1 and 2 are short term players who are accustomed to high risk, look for quick turn-around and are nimble.  Types 3 and 4 would rather wait it out before they act, as discussed below:

1. The Day and Moment Trader – If your time horizon is very short term ala a day to a week – you are comfortable on all three points so it is extremely important to try all the tricks of the trade and to measure this up and down and in your lady’s chamber stuff with a fine tooth comb and with precision.  These are the true GANN, Fib and Elliott Wave types.  They wallow in it and more power to them.

2. The Swing Trader – If your time horizon is a few weeks as a swing trader, you are itching to hit the quick moves up but don’t have the stomach to bottom fish in real time or find every nuance of what’s happening today to the “enth” degree then you look for the likes of Bingos followed by Eurekas. You also watch the friendly investment newspaper to tell you whether they grudgingly give you a qualified follow through day or a strong go signal.  Well, we got a grudging follow through day message the other day and so we are still in turbulent waters, and all of us would agree.  What’s more by now, you surely have been bitten as you stuck your toe in the water, because you don’t care to or know how to bottom fish in a moment to moment trade environment.

3. The Intermediate Term Trader – They have little stomach for being faked out.  They are prepared to wait for the usual decent move up from a bounce play before you will consider looking for long side opportunities.  In my terms that means you want assurance that the ball is currently at the 50 yard line which by now you well know is the half way blue line between the Market Top and the Current Base Low, which you have now seen drawn on the three blogs featuring the Fight between Bulls and Bears at the OK Corral.

4. The Long Term Buy and Hold Type – They are not prepared to take any risk, but want to be re-assured that having got out, they can come in and stay in for the long haul of several months to over a year; especially since this blog and others all around you tell you we are on the verge of a bear market or in one and worse yet tippy-toeing into a Recession. 

It is for the benefit of the last two types that I purposely introduced you to the thick blue pencil process, which you have recently seen on my blog notes and today in the Newsletter.  The Keep It Simple Stupid (KISS) approach really works well if you will just look for higher highs and higher lows for you decide when it is safe to come in.  All the rest is “if, and or but, coulda, shoulda, woulda stuff” that is best left to the pros at the short term game. The first lesson in the Thick Blue Line Keep it Simple process is shown below. 

   So if you are a category 3 or 4 type these are the process steps to remember:

1. Over the five year period from 3/12/2003, we had a long rally with higher highs and higher lows

2. The corrections on the S&P 500 have essentially been < 8% since from past history we know the probability is 77% that they will not be more than that, and it behaved according to form. 

3. Once you see a -11.91% correction as we did in August, that’s the time to begin to consider lightening up on your long term positions fat with profits, especially if they are laboring at the top.

4. The moment you see a Lower High followed by a Lower Low, the party is over.

5. Get your thick blue pencil out and draw the two arrow lines to remind you the direction has changed, and then for good measure draw the McDonald’s Archway, especially when it does it twice in a row to confirm that we are definitely headed down until further notice.

6. If there is a major break to the downside, expect exhaustion and a Bounce Play.  That is when you draw the 50 yard blue line between the high and the low and wait to see if it can get back on the Bounce Play to that point. 

7. Invariably you will be able to also define other points of resistance such as the 50-dma and 200-dma lines as shown which for sure keep you on your toes but hibernating in your fox hole.

8. It is not difficult to set Targets that would seem obvious to anyone who can at least show sufficient interest to read a chart at the HGS 101 level.

9. Then see if the Market can achieve those basic targets or not.  When the Bounce Play peters out, draw another blue arrow downwards to remind you to sit tight and wait for more evidence, not withstanding Bingos and Eurekas and all that good stuff  that help the short term players analyze which way the wind is blowing. 

10. I don’t have to belabor the point, but the bottom chart shows where we are at right now and at this stage we are essentially on the 25-yard line and half way to either making it back up to the first Target I set of 2540 on the Nasdaq or half-way down to retesting the Base Low and/or going down further into the doldrums.

Those who are Category 1 and 2 types and have studied the relationship of Bingo to Eureka will immediately understand that although the two signals in that sequence signify the start of a Bull Rally, it all depends on whether one is in a long Bull Rally or in the throes of a Bear Market.  A Bingo signal signifies exhaustion and/or capitulation to the downside.  A Eureka signal signifies irrational exuberance by Bargain Hunters to the upside.  Having just had a Bingo signal on January 22, 2008 followed by a Eureka signal 4 trading days later on January 28, we did in fact have a rally which was short lived, but we are currently in a retrace similar to other such rallies in a Bear Market:

1. Of the six previous Bear Market rallies, three were long and three were short lived.     

• The three long averaged 13% gain over an average of 70 trading days   
• The three poor rallies averaged 5% gain for an average of 15 trading days. 

   2. On the other hand there have been nine different occasions since 1996 in Bull Markets where such signals bode well for an average move of over 20% up in the NYSE over an average trading period of 139 days, which is significant.   

…So, here we sit on a long weekend in limbo and the Market pointing down but can go either way, though the odds favor the downside.  What is surprising is that Friday was Options Expiration as well as preceding a three day weekend for the Stock Market, yet the Market rallied into the close.  Likewise, the number of New Highs AND New Lows are both exceedingly quiet at less than 50 each per day for the past 15 of 17 days.  On Friday we had 73 new lows.  We can examine the tea leaves to our hearts content, but I say yet again to the point of beating it to death until it is drummed into our heads: we cannot expect a significant rally until we see New Highs on the NYSE exceed 100 and preferably 150 for several days in a row. We are in the thick of Earnings Reports season, so rule #1 is do not buy any stocks who’s Earnings Reports are not out yet.  Even great earnings reports get met with “buy the rumor and sell the news”.  If you don’t believe me look at what happened to DRYS the other day…up over 6% in after hours having reported great earnings and then down about 8% the following day.  But tuck that piece of news away and of course the Transportation – Shipping Industry group is hot.  Nimble is your trump card…so here are the places of opportunity: 

1. Value and Bottom Fishing or should I say “Dredging” on beaten down Industry Groups
2. Growth Bottom Fishing on beaten down past stalwart Leaders
3. Old and Emerging Wolf Packs

…and because it is a nice long weekend for you to do your homework, here is the Family tree of where to hunt:

   Good luck to you all, and thanks to our new follower from Kuwait City, Kuwait who has just signed up for the newsletter!   Best regards, Ian.

In my last blog I said “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 sure enough we got that event today!  U.S. stocks bounced higher for a second day this Tuesday morning, with investors drawing a psychological lift from billionaire investor Warren Buffett’s proposed buyout of municipal bond insurers’ liabilities and another round of cost-cutting by auto giant General Motors Corp.  Billionaire investor Warren Buffett is offering to help out troubled bond insurers by offering a second level of insurance on up to $800 billion in municipal bonds.  Just when things were looking a trifle tepid by way of the Bounce Play, this surprise news gave the stock market a 200 point lift first thing this morning.  Whether it will hold is another matter, but it is a step in the right direction to get this Market off its lows.

Late Breaking News as I go to Press: It held, but it was a disappointing day with the Nasdaq finishing flat and the Large Cap NDX got hit hard after a promising start.  It is a trifle discouraging to say the least, when the Market seemed to be shaping up for a further follow through Eureka day to finally finish as a fizzle, giving up the 30 point gain that it had during the day.  Unless we see immediate excitement by way of “oomph” tomorrow, we can write this bit of news off as a one day wonder and I am sure the Europeans who seemed to take kindly to the Warren Buffet news must be wondering what happened here across the pond.  We badly needed a 2% point day for the follow through and all we got on the DOW was half  that.    

The Bulls really need another strong follow through Eureka Day to propel the Nasdaq up to the 50-dma at 2540 BEFORE there is another drive by the Bears to take it down to test the Recent bottom at 2270.  The opportunities for the Bulls have been in essentially three different buckets according to your fancy: 

1.  Value and/or bottom fishing “dredging” on beaten down Industry Groups such as Home Builders, Financial Groups and some Retail.
2. Growth Bottom Fishing with Fallen Angels on beaten down past leaders who have lost >30%.  They include the likes of AAPL, BIDU, GOOG, GRMN and RIMM.
3. Old and Emerging Wolf Packs with Coal the best of the bunch recently, and other faithful groups such as Chemical – Specialty, Steel Producers, Alternative Energy and Gold. 

Although there have been some excellent short term gains to be made to the upside, the best tactics right now are to play the short term to the upside and take what you can get.  Of course, the market will fool you every time as the expected play is another test to the downside in what is still a Bear Market and until the market Internals show us a markedly improved scenario, the retest of the lows is the general consensus.  Allen Nevalainen on the Yahoo HGSI bb has been doing intense work around potential upside and downside targets and I see he likes the Measuring Rod (MROD) technique of simply displaying the various levels that come naturally to HGS Investors, so here is the latest update on that picture.  He had tagged 1333 as a key threshold for the S&P500 and we seem to be through that barrier for the moment.  The “50-yard line” in my OK Corral picture is always a key level especially when it coincides with a key moving average like the 50-dma, and Allen has taken to it as a duck takes to water.  He applies that concept to the intermediate rallies as well to show potential swing trade pivot points where the Index must hold for the short-term bias to change.  He does good work. At least we have been spared from a rout to the downside for now, and hopefully any retest will abate at or near the Current Base Lows shown in the chart above.  Please realize that we will need a 25% return from such levels to just get back to the old high, so that a very strong rally is needed to achieve such a target for the upside when and if we launch a strong rally.  Let’s take one small step for the bulls by holding the 200 point gain established first thing this morning, then we can worry about one giant leap for the Stock Market out of this mess.   Unfortunately, it was not to be. Best regards, Ian.

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.      

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.

We are back to a critical juncture of “The Road Not Taken”, so I will give you two Blogs instead of one!  Keep an eye out for the second note in this series.  I can see from the past notes that are being read these last few days that you are looking for any recent similarities that may give you guidance as to how to assess the current situation and take appropriate action according to your Investing Style and Risk/Reward preferences.   I trust you find my process is broad enough to accommodate any investing style and that I am consistent in my approach. There will ALWAYS be opportunities both Long and Short and the HGSI Software enables you to ferret for these.  Likewise, the HGS Process is designed for investing/trading with the wind at your back or in your face, but it is how quickly you can manage the winds of change that will make you a winner or a loser.  It is always “Your Call”.   

By the looks of things the Fed has run out of handing out Free Helicopter rides, i.e., lifting the Market off the bottoms to snatch it from a Bear Market Correction.  It did it successfully twice in the first two Gunfights at the OK Corral, but this time it is out of ammunition.  The market sold off today after the start of a bounce back from yesterday’s 370 point drop, when Philadelphia Fed President Charles Plosser said today that an overly aggressive rate-easing campaign by the Federal Reserve would only fuel higher inflation down the road.  He is a noted hawk on inflation and is a voting member of the FOMC this year.  He went on to say that this is a “damn the torpedoes, full speed ahead” approach to policy.  So we have major dissension in the Fed camp now that we have already had aggressive rate cuts these past five months. The Credit Crunch has caused at least three conditions to exacerbate the way one engages this market…I’m sure you can think of more, but three is enough to make the point:

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 Stock Market is EVENT driven where every little nuance of news causes perturbation

Under such conditions, there are quite a few Principles of HGS Investing that provide the foundation to successful Investing and above all Preservation of Capital: 

• Have a couple of Scenarios for the Bull and Bear Case for the Gunfight at the OK Corral
• Establish Stakes in the Ground from which to measure progress both ways
• Define the Benchmarks for Measurement of what to expect in either direction
• Measure the progress using known rules of thumb for determining whether Bounce Plays are strong or weak and who potentially has the upper hand.  
• The watchword is Rotation, Rotation, Rotation, and the HGSI software is top notch for spotting that, either for shorting candidates or fresh Wolf Packs.
• Remember that we are playing at the “Bottom Tail” of the Bollinger Band Normal Distribution curve, and one is looking for signals of Capitulation and/or Irrational Exuberance which is always exemplified by the components of the ARMS Index
• Watch the New Highs and New Lows like a hawk, because the numbers alone will distinguish when the true Market rally is on the cards, or that one is heading for another disappointment by a failed Rally.

You know me well enough by now that I either work in threes or sevens to describe the process, and for something as complex as we have now, I have given you the best seven I can think of on the spur of the moment to suit this situation.  Think back to the Bubble Charts with the colors of the Rainbow in HGS 101, and if it can’t be said in seven colors then you have a Camel, and the best are just three…Green, Yellow and Red. I will post a more definitive set of factors for both Bulls and Bears to watch for in the next note relating to Bulls and Bears Scenarios NOW.  As a reminder there are only seven weeks to go if you are planning on coming to the March Seminar, so please sign up ASAP if you don’t want to find we are full up.  Your feedback is always welcome and I thank those who take the time to do so. Best regards, Ian

The Picture says it all…The Bears are winning Round #3 of the Gunfight at the OK Corral so far: 

1. We had a Bear Market Correction of 23% when it went down to 2203, the recent low
2. The Bounce so far has been WEAK with just a 10% retracement back up
3. The Nasdaq and all other Indexes paused to refresh today, but it had 30 points down
4. The Bounce Play must carry on through the Resistance as shown at 2540…between friends
5. It must at least give us a 15% Bounce for us to feel that any retracement can be held
6. That would give us a Double bottom and a chance to drive up to the 200-dma red line
7. Otherwise we are headed down to test the low and maybe breakdown further
8. THE KEY to all of this is that the 50-dma blue line must first bottom and then turn up
9. NO RECOVERY WILL OCCUR WITHOUT THE 50-DMA TURNING UP. It’s currently pointing down – blue line 
10. The Bulls will not gain control until the 17-dma green line turns up through the 50-dma
11. The only saving grace so far for the Bulls is that the Market Internals have repaired fast
12. % E’s are down to a trickle, Industry Groups have gained strength quickly, but the drive must continue for this to be a real rally and not a Bear trap.
13. The Five horsemen are essentially all being hit or gasping trying to find a Base.
14. Rotation is on into beaten down Industry Groups and stocks and I have already mentioned these previously. 

The hour is late and I must toddle off to bed.  Nimble is still the trump card.  Best Regards, Ian.