Ian Woodward's Investing Blog

We got our answer today…the DOW could not hold at 9250 and down she went for another 443 point day to the downside.  It has become a trifle monotonous to see the same story unfold these past four weeks, with any hope of a Bear Market Rally now very suspect until we get through all the overhead supply that the last week has provided:

The picture speaks for itself and this game plan is solid as to where the fight at the OK Corral is at.  At this stage of the Game, the only thing for Type 3 and 4 Investors is to sit in cash and be thankful for small mercies as this is too treacherous a market for one to throw your hard earned money at.  As I have said before Types 1 & 2 are enjoying the volatility and when  one can make 15% in a day on the FXP and 8% on the QID, that is money for jam.  Now we have the birth of triple ETF’s so those of you who are high rollers can enjoy to your heart’s content if you have the stomach for it. 

It seems we caught the proper mood at the seminar, and we will just have to wait and see if we can climb out of this mess.  Recall the overlay charts I cobbled up to show you what a double and triple bottom could look like and you will realize that we are faced with six months to a year of ebb and flow before we can even begin to think of a decent recovery.

Today’s action has broken down the attempted rally which has fizzled into a Broken Bounce Play.  As I show in the diagram, all the good work of the previous week which I covered in the last blog has been wiped out and that congestion we see between 9000 and 9250 now becomes stiff overhead supply.  We have to start all over again with Capitulation, Reversal Day, Follow Through Days, Eureka and Kahuna signals to the upside before we even get a glimpse of a new beginning.  At least we can say that we now understand the Bango Process, and you are the richer for having taken the time and expense to learn what to look for.

Now that “the buy the rumor sell the news” phase on the Election is behind us, the Market remains uncertain and that is what is causing the jitters.  It will not rest easy until the incoming administration identifies two key positions, Treasury Secretary and the Fed Chairman, and then watch out either way depending on whether the Market likes the selections or not.  Of course those are not the only concerns but in any event it seems obvious that this bottoming action will be a long drawn out affair and at this stage of the game, the odds favor the Bears.  After all the yardstick suggests we are but two days away from breaching the bottom.   Five percent days up and down have become commonplace, whereas a month ago we were marveling at it. 

Warren Buffet can afford to throw a few million here and a few there and a few more out the window and not flinch, but he must know something that you and I don’t know.  My suggestion is to let the market tell you what to do based on proven Stakes in the Ground and Measuring Rods, unless you are a soothsayer or have deep pockets like him.

Best Regards, Ian.

A week ago I gave you the important Lines in the Sand to determine if the Bounce Play would hold or drop down to re-test the recent lows.  With six days in a row of positive gains the market as shown by the DOW has broken out of the Key Resistance Line at 9250.  Before one can count on a change of short-term sentiment to the upside, we must watch the extent and depth of the pull-back that is occuring today.  If the Market can hold at 9250 over the next few days, and bounce off that level, we should expect a run for a Bear Market Rally.  Anything lower than 9000 and the Bounce Play is suspect and we would most likely re-test the lows.

I have selected four charts which should show you that the Internals of the market have improved this past week but the caution is that we are by no means out of the woods.

1. The first and most important signal the Bulls have been waiting for is that we have had two Eureka signals within a week as shown by the green bars on the Nasdaq chart below.  A Eureka signal is music to the Bulls ears as it is a sign of irrational exuberance on their part and a signal that there is buying enthusiasm off a Market Low.
2. The second item is that the Force Index has turned positive the last four days.
3. The third item is that the Bollinger Band %B is now at 0.80 and this gives breathing room for the Bulls before it should retrace to the downside.

4. The next chart shows the improvement, albiet slight in the Industry Group Internals.  There has been a decided shift in those Industry Groups that are under distribution towards Accumulation.  There are none with “E” distribution, though we had a major shift yesterday towards D and C.  However, please note that the number of New Highs are still very low as would be expected with the devastating downfall the market took three weeks ago.

5.  In my last blog I finished up with a “Ray of Hope” chart which I have updated below for your convenience.  It shows that %B of the Bollinger Bands is now at a lofty 0.80 and this will give a decent cushion before it could retrace towards the Bandwidth line. Note how this latter line has come down dramatically from the record levels above 0.40 of two weeks ago, which demonstrates that the volatility has subsided somewhat.  That is all relative as we are still seeing 300 point up and down days in a row as witnessed by yesterday and today.

6. Finally, I show the marked improvement in the # of stocks with Bongo Daily “Yes”, implying they are approximately above the middle Bollinger Band, which usually serves as a springboard for better things to come in selected stocks.

In summary, the key points to watch are:

a.  The retrace must be held at or above 9250 for any hope of a Bear Market Rally

b. There should only be small dents in the factors I have shown you in the above charts for the rally to continue

c. We could do with a further Eureka and also a major improvement in the number of NYSE New Highs

d. This latter item must consistently stay above 100 with the # of New Lows below 50

For the intermediate and long haul, I do not expect this market to give a gigantic leap forward for the Bulls; rather we will probably see a long drawn out struggle for the next year as the overall Global Market conditions hopefully repair themselves from this financial debacle we find ourselves in.  At least the Libor rates have come down significantly which helps confirm that some positive results are being felt in the credit crunch situation.  I strongly suggest do not jump the gun until there is a second attempt at a rally and even then play it close to the vest.

Best Regards, Ian.