Ian Woodward's Investing Blog

High Growth Stock Investors have long since learned the secret of “Buying North of the 405 Freeway”, aka buying breakouts through the declining tops line, rather than at the brim of the cup.  This is especially true when the stock market has been trashed where most potentially new or old warriors have bent out of shape Chart Patterns that hardly resemble the ideal shapes one looks for such as Cups and Handles and Flat Bases.  In a see-saw or yo-yo market, the way to play is to Strike While the Iron is Hot and take short term profits.

In recent weeks we have seen several stocks with good fundamentals fail at or soon after breakout such as AMED, EZPW, MPWR, and VISN compared to those that have given some explosive moves such as CNQR, ILMN, NUVA, PMTC, VAR and WGOV to name a few. Had the recent rally attempt not fizzled, some of these stocks from both lists could have been true leaders.  Now they wait for fresh winds at their backs.

1. Many of these stocks show a similar characteristic of a Breakaway Gap; this usually occurs at the 405 Freeway. It implies a positive earnings surprise.

2. Those that are successful show the gap has NOT been closed, and are hovering to gain a second wind to move higher, again confirming “Wall Street halo”.

3. Only one, ILMN, has a Lower Left to Upper Right (LLUR) chart pattern and is an undisputed BIG Stock for this phase of the Market if it can hold at $87.

At times like these where we have seen some decent Earnings Reports and the market is trying to find a bottom, there are some old warriors and new candidates that are delivering false breakouts. This is much to the consternation of those dyed-in-the-wool investors who haven’t stopped to think that the so-called “standard approach to buying breakouts at the brim of the cup” is a toss of the coin and in Bear Market rallies the odds are even worse.  Here are some statistics from the past that will make my point:

I grant you that this in an excerpt derived back in the 2003-04 timeframe, but if anything, the results would be expected to be worse now given a vastly oversold market.  Short of bottom fishing or dredging which has a better pay off these days for “Value” stocks, it seems to me that commonsense suggests that given there is new news both in terms of a good Earnings Report as well as some new product or service, it pays to look for such opportunities after they have shown they have turned the corner by displaying a double bottom and have started to head up the right hand side of the “cup”.  Amazon, (AMZN) is an old warrior that is turning the corner, and is a great example to buy at the 405 Freeway than waiting for the brim of the cup.  The 405 Freeway in Los Angeles goes from North-West to South East, hence the analogy:

In the above chart, I have shown the overlay of the Fibonacci Lines and as you can see AMZN is between the 50% and 61.8% retracement level.  Stocks that are below the old high are vulnerable to providing a Head and Shoulders pattern for shorting should the Market not follow through and the initial breakout fizzles.  However, the counter to that is the reception by the Street to the recent positive Earnings Report as well as the current hype on their new product relating to “Kindle” new models of its e-book reader.  In the chart below, I give you my opinion on where to enter after the stock has risen off the bottom to be at least the 38.2% level as an early buy, AFTER the stock has made a handle.  Strike while the iron is hot off breakouts above the 50% mark is safest, and use Fibonacci to help in the buy decision:

The bottom line message is that one sure way to know if a Market is repairing is to watch the number of breakouts and the number that succeed relative to those that fail.  At the moment this is a shaky market on that score.   I showed you another way in my previous blog note which looks at the Industry Group momentum or lack there-of.  One such group which is hot at the moment is the old Solar Wolf-Pack with six stocks delivering from 23 to 62% gains in ten days!  They are SOLF, STP, LDK, SOL, SPWR, and CSIQ.  Here is another in Enrg-O&G Explor&Prod with a range of 18 to 47% with stocks like PDO, MXC, PETD, ARD and GEOI. 

In tricky markets like this, you need the assurance of safety in numbers, i.e., Wolf-Packs.  Remember that this is the summer season where volume is naturally down due to graduations, weddings, and vacations in the Hamptons, to say nothing of the Olympics these past two weeks.  The way to compensate for the lack of volume is to know which Wolf-Packs are getting the attention.  Use Wolf-Packs to find where the action is, select the stock(s) from the Wolf-Pack, and then Strike While the Iron is Hot for that day or as long as the Wolf-Pack stays hot!  Otherwise stay in your foxhole.  If 1257 on the S&P500 is broken, watch out below. 

Best regards, Ian.

Fed meeting in Wyoming against a backdrop of challenges: It is a year to the week since I first posted a note with the little fellow on the right of the picture asking the same question.  When Fed officials gather for their annual retreat at Jackson Hole, Wyo., on Friday, they’ll cover all the possible avalanches, crevices and cliffs that could send the economy dangerously off course. Conference goers are going to be debating the Fed’s dramatic actions to stem the financial crisis and protect the economy. They’ll be pondering what more could or should be done.

Recent developments in commodity prices and the dollar, combined with slow growth, should lead inflation to moderate this year and next year, said Fed chairman Ben Bernanke on Friday. The recent decline in commodity prices and the increased stability of the dollar have been welcome trends, Bernanke told policymakers and economists at the Fed’s annual retreat in Jackson Hole. The Fed chairman stressed that the central bank was committed to price stability over the medium term and that the Fed will have to monitor inflation carefully as the outlook remains uncertain. Bernanke noted that the financial turmoil that began last August has not yet subsided and its effects on the broader economy are becoming apparent in the form of softening economic activity and rising unemployment.The market has been most erratic of late, with undercurrents and crosscurrents that can snap you in two if you are not nimble.  Even the day and moment traders are having a tough time of it and stock market forums are more silent these days as they enjoy other things such as the Olympics, vacations, graduations and weddings rather than lose money in the stock market.

The recent attempted rally fizzled with a bad week this week, and today we are experiencing an oversold bounce.  What else can one call it when the market swings a couple of hundred points every other day?  The underlying internals are putrid and it suggests to me that unless one sees some excessive irrational exuberance by the bulls’ ala a Eureka or two, we are always doomed to failure on attempted rallies when the market is so oversold.

The “Internals” of the Industry Groups are discouraging with only one Group having “A” Accumulation (Insur-Brokers), and 83 with A+B ratings out of 154 Industry Groups overall or 54%. DI+/DI- is much better with a 69:31 split.  Note that the three follow through days on 7/29, 8/5, and 8/8, eventually turned the picture from Red to Yellow to Green.  However, the choppiness is very evident with the Industry Groups still weak as shown in the last six readings in red.  The only saving grace is a benign VIX Index which despite all this upheaval has remained placid.  Let’s take a roll call:

1. The Oils:  Now very erratic as we would expect.  The oil ETF, USO did come close to 90 as I told you to watch, bounced to 98 with the Russia-Georgia fracas and headed down again.  If it breaks 88 to the downside, the oil stocks will be hit badly but the market will probably head upwards as Oil heads below $110/barrel (say).

2. Favorite Old Wolf-Packs:  These include The Solars, the Coals, the Fertilizers, the Steels, the Transport-Shipping, the Machine-Generals, the Chinese Silverbacks.  The only way to play these is to have Wolf-Packs at the ready and on the day, moment-trade or day-trade them.  Solars and Fertilizers and an iffy Coal group have bounced nicely this past week, but nimble is the word.

3. Reviving Industry Groups: The Health Care including Bio-Med, HMO, Nursing Homes and Health Instruments have all bounced nicely and are generally strong.

4. Technology is gaining momentum especially the Small Caps, and there is the usual litany of Groups for this lot.

5. Dredging and Bottom Fishing:  Of course, Financials, Home-builders, Leisure-Gaming and on and on is where the value is.

6. False breakouts: The real problem is that too many false breakouts are occurring on what potentially are leading stocks with ERG and RS high at >240 and 90, respectively, that the only players making money are extremely nimble day traders.

7. Folklore: This is not unlike the late 2002 and early 2003 timeframe, where the Market itself is so oversold that it requires a major groundswell of committed buyers to show their commitment.  Although it was excusable these past weeks for one to see a void in Eurekas from an extremely oversold position, it is now time to expect these to appear or one should continue to be very suspect of this market. 

We shall see what the Jackson Hole Meeting of the FOMC brings, but don’t expect anything more than platitudes and a wait-and-see announcement.  Meanwhile, I continue to enjoy the Olympics, which I told you would bring major focus to China!

Best Regards, Ian.

I note my readers are wondering why I have been quiet lately.  Not really, but like most I have been enjoying the Olympics and more importantly preparing the monthly High Growth Stock Newsletter, which will be out later today:

Overview:

In my recent blog I identified three items that could individually or together provide a Cataylst for this market to kick it up on a Bear Market Rally from the doldrums we suffered last month.  Sure enough the bubble bursting on the price of oil, the U.S. Dollar rising and the euphoria around the China Olympics* have all kicked into high gear this past couple of weeks and we have seen a decent, albiet choppy, rally these last couple of weeks.  What we have learned is that when Rotation from the Leaders take place in earnest, you better not be on the wrong side of the market…but then again we knew that only too well; it was only a matter of time before the old favorite Wolf-Packs took a shellacking and we look for new leadership.  It comes in two forms:

1. New Leadership with strong ERG candidates…though many experiencing failed breakouts as is ALWAYS the case in a choppy rally, leaving those who are purests of the 7-8% stop loss rule cringing at being stopped out time and time again, and

2. Dredging with beaten down Industry Groups that are always tasty morsels when they have been trashed so far down to present value for those who like to bottom fish.

My focus this month is to walk you through this most recent set of events from the high back in June through Capitulation to Reversal and Follow Through days.  As always, Ron has come up with a view in the Charting Module that gives us all we need for Capitulation and all of this will unfold at the workshop as Bango! We now have all the bases covered based on 7 years of research starting with Eureka!

Ron’s movie and focus this month is “Determining Position Sizing and Risk/Reward with the Oz Calculator”. The huge advantage of following this procedure is that:

1. You know your risk; the reward is uncertain
2. Once the trade is filled and your stop is in place, the fear is gone because you know how much exposure you have to the market

The next High Growth Stock Seminar will be from October 25 to 27, 2008, and Ron and I thank you for your full support as it is SOLD OUT two months ahead of the date.

* China Olympics…For the casual reader who may wonder what on earth the Olympics has to do with the Stock Market Rally, please look beyond the Olympics themselves which had the most spectacular opening to the games in my memory.  It demonstrated the power of China in technology, resourcefulness & discipline of mass-manpower, and overall artistic imagination.  However, an earlier point I made was “Oddly enough I feel the Olympics could be a Catalyst as China becomes front and center for the next two weeks.  You can rest assured there are background talks going on to reverse Wall Street’s downward slide that triggered a 40% sell-off in China Silverback Stocks, keep U.S. consumers buying China goods, and keep $1 trillion in U.S. dollar-based investments from free falling into an abyss, which in turn could rock the Chinese economy for years to come.”

Best Regards, Ian.

Sometimes it takes a Catalyst to Make the Market Rally off an oversold state.  I suggested the three factors required two blogs ago.  With any luck we may have got all three of the factors I suggested to make it happen!

1. U.S. stocks rally as crude drops to 3-month low – U.S. stocks on Friday rallied as a surging dollar pushed the price of crude oil to lows not since seen early May, helping investors set aside the latest fault line in the housing sector, which came in the form of large losses at Fannie Mae.

2. Dollar extends broad rally as euro withers – A sell-off in crude-oil futures, surging stocks on Wall Street and U.S. economic data showing a rise in productivity further fueled a dollar rally Friday initially sprung by concerns about euro-zone growth.

3. Fireworks and number 8 kick off Beijing games – The Games will ceremoniously begin Friday, the eighth day of the eighth month of 2008, at the carefully chosen moment of 8:08 p.m. local time.

It goes without saying that most have been worn to a frazzle with this yo-yo market, but with luck we may get some respite and see a decent summer rally.

On CNBC, Art Cashin said this week looks a lot more interesting, but he is not quite ready to give it the Miss Universe Crown yet.

We know that the Medicals by way of the Biotechs, HMO’s and Nursing Homes have all been hot, but now as a winky-winky we see the Technology Sector coming out of the ashes.  This bodes well for a potential rally.  Good Luck.  Best Regards, Ian.

At this important juncture, I felt I should post this note in its entirety without any editing.  If it is too much to digest just move on, but I feel it is a good educational follow-up to the thread of posts relating to Follow Through Days (FTD) and a perspective of the pulse of the current market.

Mailbag Discussion:  

I have spent some time studying. I like you have been waiting for a Eureka and confirmation with new 52-week highs. I created some new views on High Growth Stock Investor to help me go back in time. I looked at the Coppock, Eureka, NYSE new Highs and Lows as well as a follow-through day visual filter back test. I made up a daily Coppock that mimics the Weekly Coppock using 50 and 70 days and 50 day average. It tracks the weekly quite well.

I went back to 2003 in a NYSE daily chart and studied what I saw comparing to current time. In 2003 we did not get a Eureka until 30 trading days after the 17 March 2003 FTD, the Eureka came in late April. The NASDAQ followed through on 3/17, the NYSE did not as it was just day 3 on the NYSE. The NYSE 52 week new highs did not broach 100 for 12 days after the NASDAQ FTD and then it dallied for a couple of weeks before really taking off.

What I see now in the market looks a whole lot like the 2003 time frame (different stocks and groups breaking out). I also think that it is quite impossible to have a Eureka when the market is in a big rotation as we have now and as we had in March of 2003. I think the Eureka works well for follow-on rallies but when we are in a major rotation it may not work. Think about it. The Eureka requires a large ratio of new advancers to decliners. When the decliners are so huge like the oil base stocks tanking it is quite a high threshold to expect that advancers could overcome this downwash. It took 30 trading days for the market to confirm the rally in 2003 because of this.  Mike Scott

Response:  Mike:  You are absolutely right that one’s expectations for a Eureka should not be within the normal 12 to 15 days of a Capitulation, given the parallel to 2003, but there are at least a few other factors that must come into play on the positive side while the tide is out that we should like to see shaping the internals:

1. As I said on my blog the first expectation must be that the New Lows go dormant. I note that over the course of 21 days after the Temporary Base Low, one should expect this number to average about 40, with less than a handful of days at above 50 during that period.  Over the past 14 days that number is at 64, so it is not dormant yet, and we have not had a single number below 42 to date, using HGSI data.

2. The second yardstick relates to the components of the Eureka.  I buy your argument that New Highs and Advancing Issues to Declining Issues cannot be expected to rise from the ashes in so short a time given the rotation and Oil stocks being a big part of the clobbering.  However, on that which is moving I certainly expect that there be some more enthusiasm in the beaten down stuff they are now buying to the extent that the Advancing Volume to Declining Volume should show some perkiness.  Furthermore, back in 2003, the ARMS ratio itself kept dropping below 0.60 at least ten times and the Adv Vol: Dec Vol was up at least 6 of those occasions to above the 5.40:1 requirement while waiting for a Eureka.  In effect, we had six 2/3rds. of a Eureka! That tells me that there is insufficient buying pressure with conviction on the NEW Groups to which the herd is rotating into, since we have not had a single reading on either of them making the yardsticks.  The inference is that we are so badly trounced that either there is insufficient conviction or we have still a ways to go before we see more enthusiasm.  The bottom line is that we are still stuck in the mud.  Even the Biotech’s got clobbered today.

3. Let’s not forget the simplest and most reliable of requirements which are that the 50-dma must be flat, and the 4-dma, 9-dma and 17-dma must all come up through it at the 405 Freeway mark. The 50-dma is not flat at the moment, to say nothing of the 200-dma which is pointing down. Both items appear to be at least a week off for either the Nasdaq, or more so the NYSE at this time…though all our past history on this particular item has been on the Nasdaq.

4.  Sadly, on this occasion just like 2003, we have the black cross of the 50-dma below the 200-dma, so the expectations of the ceiling is at that very point of any rally before it peters out, if it even gets there.

5. The bigger question is whether we are truly at early 2003 or one stage removed from there at October 2002.  In which case we had plenty of Eurekas in that phase, but what is missing so far are the leaps and bounds of Price Gains that propelled the Nasdaq out of the basement back then.  In my blog I mentioned that we need some catalyst to cause this to happen.  Back in 2002 and 2003, everyone had thrown in the towel and more importantly had done so over three years, not less than one.  Somehow, I don’t feel the swamp is fully drained yet, nor is there the irrational exuberance to really come into the market with a vengeance, which is usually signaled by Eurekas.

6. What is more important is the extent of the Bingo count this time which is similar to back then, so it suggests at least we are seeing some signs of throwing in the towel, even though the VIX is relatively quiet.

7. If Industry Groups don’t show signs of improving towards the A and B column in a hurry, this attempted rally is little more than mostly bottom fishing and identifying some potential leaders for the next round trying to repair their bent up chart patterns into decent shapes.  We can take some comfort that the number of A’s have improved from 5 to 19 with the last two FTD’s and from 56 to 74 on the B’s.  That means we have a 60:40 split between the former and the C to E Groups, since as you know we have a count of 154 Groups.  I am sure today’s action will kill some of this again.

8. Now I know all the stock market forums are anxious to know whether FTD’s are enough of a signal to go by and we have both proved that it is no better than a toss of the coin, so it was comforting to see the second punch at it yesterday where at least the Nasdaq is showing a lot better response than the DOW, the S&P500 or the NYSE.  However, it seems to be two steps forward and one or two steps back, which does not allow for even holding overnight, leave alone a few days to weeks.  When one has three black crows without five white soldiers any rally is suspect.

9. It appears to me that Type 1 and 2 traders are the only people who can make money provided they are nimble, turn on a dime, and essentially moment or day trade.  Type 3 and 4 longer term investors are not going to miss a thing given what we have seen these past two weeks.

The bottom line is that it takes more than a couple of Eurekas to confirm a decent rally and if I left you with that impression then I feel sure I may have done so for most of my readers who are not so well versed with the dynamics as you are.  In which case, I would like to use your note to me and this response as a teaching tool on my blog by way of educating them and perhaps your readers that life is not that simple in Bear Markets.

Best regards, Ian.