Ian Woodward's Investing Blog

A High Five to my Greek friends and bloggers, Thrassos!:

Jay Robinson asked for a clarification on the New Highs and New Lows in the Comments section in “Where next for the Bear Market Rally” and I felt it would also be useful as a quick note here.

1.     Jay Robinson Says:
May 8th, 2008 at 6:02 am   edit

• Hi Ian, I think you’ve mentioned this before but there still seems to be a little confusion (probably on my part).When you say 150 new highs as in the following sentence:

• NH – NL – The New Highs versus New Lows are both semi-dormant, and until we see some measurable difference to the tune of at least 150 New Highs, this rally remains suspect in its conviction for the Bulls to show they have full confidence and have taken command.

• Do you mean in the NYSE alone or in the NYSE, NASDAQ and AMEX combined? I’m thinking you said in the past, the NYSE only but can’t really remember.

 2.     ian Says:
May 8th, 2008 at 9:40 am   edit Hi Jay: Thanks for asking about clearing up the NH – NL good stuff.

• All my work is done off the NYSE ONLY. This includes the Eureka, Hindenburg Omen, etc.

• Ideally one needs to see at least one day with the New Highs greater than 150. We had four days back on 4/16, 4/17, 4/18 and 4/21 when the readings were 109, 103, 118, and 106, respectively. I took that as “Close enough for Gov’t Work”.

• Likewise the New Lows have been Dormant with the highest number on 4/22 of 66 and mostly since then less than 30. That again to me was a good sign.

• The last two days the New Highs have perked up again with readings of 93 and 84…yes 84 yesterday, even though it was a bad day on the Market all around, compared to 32 New Lows. I wish I had seen that yesterday…that was a good sign.

• We need to see the New Highs go back up above 150 and stay up there for days on end for a truly strong Bull Rally.

• Now here’s the important point…New Lows can also rise, but we need to see NH -NL at least 60 apart consistently for the Bulls to have control.

• Lastly, when the New Lows begin to dominate, that is the time to look for a correction until the cycle starts all over again.

• Finally, keep an eye on Ron’s chart on this stuff in HGSI…the view is Hindenburg, NYSE New Highs, New Lows.  It will tell you all you need to know in one glance!

Best Regards, Ian.

• Last night I gave you ten items to ponder on and warned that one should always let the market tell you which way the wind is blowing.  I suggested that “the Bulls have the edge for now” but two of the three items I gave to the Bears were the 200-dma Ceiling and the VIX, below: 
• “3. Volatility Index – The VIX complacency with now over 25 (trading) days since the %B has been below the Bandwidth of the Bollinger Bands, has now found its historical mean level of around 19, but is substantially below where the Bears had hoped to make it four in a row for an assault on the highs bouncing off its 200-dma…with no such luck.  However at this time they are beginning to smell blood, given that there is little further good news for a while in the offing.  Although the Bulls are in control, this one goes to the Bears, since it would appear we are now reaching overbought levels.  However, I sense that if this low volatility keeps up the worst that might happen is a quick knee jerk upwards and then again have the %B turned back below the Bandwidth…suggesting more of a pause to refresh and then renewed efforts to drive the VIX below 18.” 
• The Knee Jerk came as quickly as today, so one goes immediately to the chink in the armor to evaluate the possible scenarios both down and up for the market based on the behavior of the VIX.  The beauty of watching the VIX in real time is that Market Volatility immediately shows a marked jump up when the market is having a very bad day like today.  You can make a quick decision based on this…of course the other usual indications will be present, but it is easy to keep an eye on just a couple of numbers as I show below to make up your mind when there may be a change in sentiment in the short term. 

The Case for the Bears:   

1. The VIX jumps up again as it did today and on the heels of the Little Kahuna (a 1-Dy Chg in %B of >0.24) it gave today we get yet another one or worse yet a Big Kahuna which is a >0.40 jump in %B.  The Light Blue Little Kahuna is shown at the bottom right of the chart below. 

2. Two Kahunas in a row are very significant, even if they are just a few days apart.

3. EVERY recent VIX move from its lows to what eventually became major Bear Market drives STARTED with several Kahunas, big and little, within a short period of time.  For Kahunas read strong momentum and that is the secret to tea leaf reading with the VIX.  If it doesn’t deliver on this score, do not be so quick to jump ship, but you certainly need to keep tighter stops after today if you are long.

4. So here is a simple spreadsheet to keep your eye on the ball as to what MUST happen for the Bears to gain control once again and for this rally to fizzle.  The VIX reading is currently 19.73 and with a Little Kahuna can take this to 21.20.  With a Big Kahuna the VIX reading can move to 22.30.  That is all you have to watch for in the next couple of days to see which way the wind is blowing.  Either of those readings and preferably the latter would constitute a VIX Sell signal for the S&P 500.  Note from the spreadsheet that today the %B just poked its head above the Bandwidth with a reading of 0.08 today.  This after over 25 trading days being below as seen in the chart I show below the spreadsheet.

     5.  Note in the chart below, the VIX is just below the 17-dma line shown in green.  It must get its head above that and the middle Bollinger Band shown dotted just above the 17-dma. In my judgment it can only achieve that if it has a convincing move up with either a 0.24 or 0.40 move in %B.  Otherwise it was a shot across the bow that then faded away as the bulls once again righted the ship so to speak.  After a brief move sideways the Market Indexes should then move up again if the targets I have set above are not achieved.  While I am at it, the S&P 500 must hold above 1370, and then for sure at 1352 or this rally is doomed.

The Case for the Bulls:

• The Bulls have a little breathing room since the VIX Index is a good ways away from its 200-dma.  I showed you in previous charts how it was beaten down by two lines down from its 200-dma., so there is elbow room. 
• Note how the 50-dma blue line is almost touching the 200-dma red line.  Any further downwards move and this would be a Black Cross and enhances the Bulls chances of the Rally continuing. 

 So there you have it…it’s not difficult to work out the targets with the tools we have.  Always remember that it is possible to develop Technical Analysis Scenarios with the VIX, even though it has no volume to accompany it, to decide which way the wind is blowing and the targets that must be achieved for both the Bulls and the Bears.  The secret is with the 1-Dy Ch in %B.  Use it.  All it takes is Kahunas to volley and thunder! Best Regards, Ian.

The S&P 500 has rallied over 13%, the Nasdaq 16%, the DOW 13% and the NYSE 13%, and this is essentially half way back to the highs, between friends.  Since the Base Low on St. Paddy’s Day, we have gradually worked our way back while Type 1, 2, and more recently Type 3 investors have all had varying degrees of success.  Type 4 longer term investors have probably felt the market is still too jittery and are waiting for signals that all is clear for them to venture back in.  There are several forces at this point in time which must be overcome to make that call: 

1. 200-dma Ceiling – The Market Indexes are all within a few points from their 200-dma and that is an important resistance level which must be broken to the upside…the glass ceiling problem that makes all Bears feel it is time to take short positions.  This one favors the Bears.

2. Coppock Indicator – On the other hand, the Monthly Coppock Indicator which is a long term measure of when the correction is exhausted to the downside shows that all indexes have either gone negative or are close to doing so and are about to turn up, which bodes well that within another month or so we should see that happen.  This one favors the Bulls.

3. Volatility Index – The VIX complacency with now over 25 days since the %B has been below the Bandwidth of the Bollinger Bands, has now found its historical mean level of around 19, but is substantially below where the Bears had hoped to make it four in a row for an assault on the highs bouncing off its 200-dma…with no such luck.  However at this time they are beginning to smell blood, given that there is little further good news for a while in the offing.  Although the Bulls are in control, this one goes to the Bears, since it would appear we are now reaching overbought levels.  However, I sense that if this low volatility keeps up the worst that might happen is a quick knee jerk upwards and then again have the %B turned back below the Bandwidth…suggesting more of a pause to refresh and then renewed efforts to drive the VIX below 18.

4. NH – NL – The New Highs versus New Lows are both semi-dormant, and until we see some measurable difference to the tune of at least 150 New Highs, this rally remains suspect in its conviction for the Bulls to show they have full confidence and have taken command.  Although we would expect the New Highs to be a lot higher, there are fresh signs of life just today that they might be stirring again.  With the New Lows so calm, I feel that we should give a slight nod to the Bulls.

5. Old Leaders – With the Earnings Season now at its peak period for the second quarter, there has been some brutal profit taking in the Leadership stocks in the Wolf Packs that have been in vogue for a long time, i.e., the Fertilizers, the Solars, the Steels, the Transport – Shipping (hit hardest earlier, but now cleaned out and showing signs of life again).  Likewise of the five Silverback Gorillas of the last Bull rally, only GRMN has bit the dust, though the other four all had big corrections.  However, they have or are recovering every day and the likes of AAPL, BIDU, GOOG and RIMM all live to fight another round.  It is only natural that most of these groups will come up against the “double-top syndrome” and will likely stall there before driving through.  Bears.

6. New Leadership – Beaten down new leading Groups are in Machine – General and Technology by way of Internet –Services and Semi – Mfg as I mentioned ten days ago.  Although the number of High ERG stocks over 270 rose sharply a week ago, it is still below 100, though overall Accumulation in the broad market has risen sharply and suggests the rally is beginning to make all boats rise.  The Bulls have it for now.

7. Psychology – I gave you the Line in the Sand where the Psychology of the market turned distinctly bearish on January 10 and only last week I showed you where having now broken through that same Line to the upside, the perception is that the market accepts that the worst is over.  Unless there is another major shoe to drop by way of a surprise, in my opinion we should pause to refresh and then make another assault on the remaining challenges to turn this into a decent Market Rally. Bulls.

8. Long Term – Now we come to the 40-week Bollinger Band process I have described before and showed again recently called the “Mark Pharr chart”, and that beast is still below the moving average, so we do not have the all clear from that point of view, though it has been inching up to the middle band surely but slowly.  That tells us we are still in a Bear Market Rally for now.  Bears.

9. Seasonality – We are soon reaching the season of graduations, weddings and vacations when Wall Street traditionally turns to mush, and that statistically gives us the worst three months from July to September.  In addition, in an election year, June is the 3^rd best month on the Nasdaq, so Technology may be the sector that keeps this market up before the summer doldrums, since it already shows signs of improving. Bulls.

10. Market Winds – In Yorkshire, England, there is a favorite saying regarding the weather which goes “Ne’er cast a clout till May be out”, which translated means don’t get rid of your winter woolies until then.  I was a Londoner before becoming a Philadelphian, New Yorker, Texan and Californian, so maybe we can stretch this rally to June!  My saying is “When the wind is at your back, Attack; when it’s in your face…Disgrace”.  Let the market tell you which way the wind is blowing. 

 In Summary, the Bulls have the edge for now, but like the signs of the Zodiac they can change in a hurry.  I am not a soothsayer, but I just look at the Tea Leaves and the feel is as I see it above.    Best Regards, Ian.

Best Regards, Ian. 

1. It is just two weeks ago I reminded you that the original targets I had set for the Bulls and the Bears to take note had turned out in favor of the Bulls, which suggested that the current Rally would continue for a while, until we had another decisive signal one way or another. To save you looking it up I wrote in part… 

2. “The most exciting one is a -0.24 %B 1-Dy Chg to the Downside, which spells a Little Kahuna which would have the Bulls Prancing.  I have news for you…it hit -0.21 yesterday which is close enough for Government Work, and so the Bulls danced and pranced yesterday and they breathe a sigh of relief for now based on the INTC and IBM Earnings Reports.  You will note that the VIX is close to the Lower Bollinger Band at this point, and the bulls are looking for it to either break it further to the downside or at least stay dormant.  If it bounces from here…well you know the drill from here by now.”

3. Two nights ago, when the % B just poked its head above the Bandwidth, I warned that this might bode well for the Bears, but it would require a Little Kahuna to the upside to clinch it, i.e. a move up from 20.24 to 21.56 in the VIX assuring a Bollinger Bands %B 1-Day Change of >0.24.  To those new to this concept, it implies a significant change in Volatility.  Likewise a change of -0.24 would be a strong signal favoring the Bulls since the VIX works opposite to the Market Indexes. In that note of April 29 when I felt that Helicopter Ben’s scheduled “Pop In “ visit would be the deciding factor t which way the wind would now blow, I wound up that note by saying…

4. “Meanwhile, back at the ranch, the VIX has laid dormant for all of 20 trading days and for the first time poked its %B head above the Bandwidth today…a sign that could lead to the Bear’s dancing once again. What will it take for the VIX Bear followers to do cartwheels that their patience has been rewarded?  My crystal ball says an immediate bounce of the VIX from 20.24 to 21.56 will do the trick and that too will depend on what the Fed has to say tomorrow.  Otherwise anything below a reading of 20.00 will suggest more ambling sideways with a dormant VIX, and there may be hope for the Bulls to continue upwards. 

5. In summary, we have a confluence of forces at this point in time between the Line in the Sand at 2440 on the Nasdaq, the Rotation vs Correction discussion, the VIX laying quiet, the Earnings Reports, all waiting for a nudge as to which way for the Market Indexes to go.  That nudge will likely come from Helicopter Ben popping in on us tomorrow.”

6. I won’t prolong the suspense, but the confluence of forces has been resolved in the Bull’s favor, and the VIX handed them icing on the cake today with a Little Kahuna of a -0.29 move to the downside in the %B to take it down to 18.88!  That is manna from heaven for the Bulls, and suggests the Rally should continue for a while longer.  Some might think that this low volatility implies complacency, but beauty is in the eye of the beholder.  Recall in earlier charts I showed that the VIX was around 12ish before it took off into the sunset on four bouts of extreme volatility to over 30, but it is still a long way off where it needs to go for this to be a full blown bona-fide Bull Rally that pulls the Market out of the doldrums of the Bear Market it has been in for all of 6 months now.  The more important point is that the Bulls have “Breathing Room” for now, so enjoy it.

7. However, do NOT count your chickens before they are hatched as tomorrow brings the Employment numbers and these days the Market moves on the latest news, i.e. yesterday’s news will be stale by then! 

1. This was a big day for the bulls with a strong push through the 2440 barrier on the Nasdaq. The big winners in the leading stocks came from the Technology and Machine – General arenas to name a couple, including a few Chinese Silverbacks, e.g. JRJC, SOHU, PWRD, NPO, GRC, MPWR, ANSS, and SNHY as examples.  Water Pumps are big right now!  On the other hand, many of the favorite Chemical – Specialty stocks are trying to find bounces and support off their 17-dma, 50-dma or 200-dma. The jury is still out as to whether there is rotation out of this group; or whether this is normal corrective action in a group that has had a long strong rally, is fat with profits, and with the glowing Earnings Reports, they are suffering from the accompanied usual Analyst downgrades at such times.  Stocks such as POT, MOS, CF, TNH and TRA in this group need careful watching.

2. Let’s see what tomorrow brings and then Ron will have a full review in his Weekly Movie and I will chime in if I see some clear direction.  I hope I have led you through the tulips and the minefields with the factors that influence decisions around Earnings Reports and Rotation vs Correction concerns.   

Best Regards, Ian.