Ian Woodward's Investing Blog

I couldn’t resist the old Scottish Ditty about taking the High and Low Roads to Loch Lommond:

At the seminar just finished ten days ago, I drummed in the need for all good students of the Market to have a Game Plan.  That Plan must have Stakes in the Ground and Measuring Rods to establish the “Must Achieve” targets for a Type 3 Swing Trader and then a Type 4 Long Term Investor to get excited about engaging their hard earned money in the market.

I think most got the logic of the factors I used and understood they were based on a mix of past experience, proven targets and  Fibonnaci numbers.  I also suggested we review the bidding from time to time to know whether we are on track for Recovery from the doldrums of a near Depression scenario; or whether we will sink back into the abyss to drive below 667 on the S&P 500. 

I gave you the Game Plan just one week ago, but it probably had meaning only to those who attended the seminar.   I will repeat it here just to drive home the key winky winky which indicated that 741, 840, and 940 were key targets of support and resistance to watch:

It is now over one month since we hit the Base Low of 667 on the S&P 500, and Barney Frank came to the rescue with his double barreled speech of “Mark to Market” and “Up Tick Rule”.  I covered that in my Blog of March 10th, 2009.  Whether they ever materialize remains to be seen, but if they do they should be a major boost to the market, especially in reducing the extreme volatility we have endured recently.

My son and his wife are itching to throw the dice and get back in with their 401-K money having been patient and avoided the major downdraft.  So this picture is for them and for those who understand the Saw Tooth Plan I derived for them for “Must Achieve” targets. I can now say that the first leg of the Plan was more than satisfactory as shown on Line 1 of the chart below.  Understand we are still not out of the woods, but it is a good start:

The simple requirements were that the S&P 500 achieve 21% up and no more than 8% down, both Fibonnaci numbers and lots of history to back up the rationale as to why they are key in the scheme of things.  You will see that we achieved 24.9% up and so far if the recent low of two days ago holds we had 6.4% down as seen from the chart.  Please understand that the critical Line in the Sand on the down side is still 741 as I show in the Game Plan Chart above, but at least we have a decent cushion should there be a major negative surprise of yet another 4% drop in one day as we had a couple of days ago. 

Those who attended the seminar will refer to their chart on page 125 and compare it to the chart above.  The current status shows that we have a fighting chance to achieve Line “2”, which I have tweaked to now aspire to the 940 Target which is key.  This target kills two birdswith one stone…the 940 target and over 40% up from the Base Low, which are MUST achieve targets to be assured we continue on the track to Recovery.

Please also note that we can then sustain a 10% downdraft and still maintain the Saw Tooth requirements of Higher Highs and Higher Lows as shown on Line 2 of the Plan.  Likewise, it will keep us above the critical 840 line in the sand, if and when it is achieved.

The bottom line is the next few days will determine the odds for Type 3 Swing Traders or those wanting to take a chance that we are in the throes of a decent Bear Market recovery.  As you have observed I have narrowed my critical search to the information on the four charts below…the S&P 500 Channel that we are in, the VIX which has been ominously high despite the strong move so far, a feel for the Bull vs Bear Momentum as measured by the QID:QLD Total Dollar ratio and lastly its relationship to the Nasdaq which is a new perspective.

The Market is marking time waiting for the outcome from the G 20 meeting in London.  The Prudent play is to Mark Time.  Good Luck whatever you decide, but it is always “Your Call”.

Best Regards, Ian.

As I said in my last blog the market has played into the short term traders and
Type 3 swing traders hands.  The Rally this past month has given the Bulls
breathing room and a cushion above the abyss of 667 for the S&P 500.  As I said
before, that line in the sand is crucial:

1.  When one has five uncontested Eurekas inside 12 days, that suggests the
Big Bulls are beginning to put their money where their mouth is.  They have
tread water these last four days as shown by the chart of the S&P 500 below.
If the S&P 500 breaks down below the lower channel at 815,  the line in the
sand is 741 for any chance of this rally to continue.  That is 11% down from the
rally high of 832 and is as much as they dare give up.  Any further drop and the
rally is suspect if not over.  667 is a strong line in the sand for the Bulls and is the
last stand at the OK Corral.   After that the Market morphs to the depression
scenario once again.

2.  We have now gone sideways on the VIX for two weeks…gone quiet, and
sitting quietly in the 40 to 42 area.  That would seem surprising as I remind you
that the Bulls have charged up 22% from the Base Low during this period.  We
would have expected it to break down below the 40 level by now.

3.  The Fear, though subsided, is still hovering around for the next shoe to drop in
either direction.  It must break to the downside below 40 and head down rapidly
towards 30 for the second leg of the Bear Market Rally to continue. Conversely,
if it drives up rapidly above 45, the fear will be back and the rally will be over for
now.

4.  The Game of Checkers is simple.  We are currently hovering in Square “2”.  The
Bulls want to drive it down to Square “1” while the Bears can’t wait to move to “3”:

5.  As I said in the last blog, the Bulls must break the fear by driving the VIX down
to below 35 and then with luck to 30.

6.  How do we know if the Bulls are winning and have the Bears on the ropes?  There
must not be any Phoenix signal for 50 days from the last one on 03/02/2009 and we
are just half way to that point.  At that stage there is an 80% chance after a small
pullback that the Bear Market Rally is still intact and on its way to achieve a sizable
rally measured as over 40% to 60% from the Base Low of 667.

7.  Conversely there is a 50:50 chance that a Phoenix can appear now, so we are still
in the arena of a toss of the coin that we could trot down.

Net-net, the Messages are:

I.  If the 815 trendline of Lower Lows is penetrated to the downside, it must hold
above 741, preferably above 757, and then move up to go for a second leg up per
the Template I gave you at the seminar.   A strong push up from here is key.

II. At that time Type 3 swing traders may feel they should try to nibble for a move
which could last a further few weeks until the bulk of the Earnings are out by the
first week of May, when the Market traditionally is inclined to swoon. 

III. The street will be watching the EPS reports for the Big Banks for the 1st qtr. and
if they are not positive, the rally will probably fizzle.

IV.  The Big Banks, Technology and Small Caps will probably lead if the EPS reports
are healthy.  If not…back to the foxholes and/or go short.

Best Regards, Ian.

My Father was a great bridge player and taught me well.  He would make sure to
say before the hand was played: “Son, always review the bidding”.  So let’s
review the bidding:

In my last blog of March 10, all of 15 days ago, I left you with a strong winky-winky
that said:

“Late Breaking News – We have had a confirmed rally…how long it will last in this
skittish Market is another story for another day”.  That day is today.  Unfortunately,
people are too busy these days as they spend time multi-tasking and don’t soak in
the messages that count.  Those that attend our seminars are taught to read
between the lines, so although they were prepared for gloom and doom, they
also knew that there may be a ray of sunshine. “Confirmed Rally” with an Eureka was the clue I gave you 15 days ago, before I had to prepare for the Seminar.

1. We certainly got that boost this past Monday with the strong move of 50
points on the S&P 500 which took us from 770 to 820.  A 6.5% rise in one day
is the reverse of what we endured during the landslide on the downside so
it was certainly time to sit up and take notice.

2. We have now had 6 Eurekas in a row with nary a sign of a Phoenix, so it
means that the shorts have scurried into their foxholes, are covering their
shorts mighty fast and for now are waiting for the Bear Trap to pounce.  The
start of that trap could well be today, unless that Bulls can hold the line
above 800.

3.  We know from past experience that a good rule of thumb for a reasonable
rally is between 20% to 25% up from the Base Low.  With the Base Low at 667,
we now have a potential target of 800 to 834. We hit 826 today at its high so
that is close enough for government work…first mission accomplished.

4.  Now What?  Either we come rattling down with the Bear Trap to wind up
with a -8% drop which takes us down to 760 or the Bulls will have none of it
and hold the fort above the psychological barrier of 800.

5.  Anything less than 741 means the Bears did the rally in and the Bulls must
re-group or once again throw in the towel as the S&P 500 trundles on down
to re-test and/or break the Base Low at 667.

6.  Seminar attendees now have the “Saw Tooth” Game Plan that either
confirms the rally is on or find that Type 3 Swing Traders must once again sit
on the sidelines waiting for another attempt off the lows to start a bear
market rally that has some legs.

7.  Now to give comfort to the Bears, the challenge is simple…their goal is to
hold the VIX at no lower than 40 and so far they have done that, despite the
rapid move of over 23% up from the Base Low.  Until this is broken vigorously
to the downside with “three black crows” (big red candles) to drive down to
30, we will meander in a trading range or once again have the fear of morphing
into the depression scenario which I covered adequately to show the dark side
of the looking glass.  Furthermore, an ARMS reading > 2.50 will trot out another
Phoenix sooner rather than later and the Rally will then be finished for now.
The Bears objective is to drive the Fear up with a VIX reading > 45.
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8. The Bulls would have had less than a month between Phoenix signals to bask
in the sun and they now know what to look for on that score before the odds are
heavily in their favor.  My point is that the HGSI Proprietary Impulse Indicators
have given us enough faith to follow them in these turbulent times to keep us
on the right side of the curve and to know when the odds are heavily in our favor
or no more than a toss of the coin.
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9. Follow Through Days in Bear Markets are little more than a toss of the coin,
while attendees learnt that we now have better tools to guide us out of this mess.

The Game Plan is now straight forward and there is no excuse for you to lose your
hard earned nest egg.  You and I know that the Market is totally “Event” driven by
the four principals as we discussed at the Seminar, so be leery and watch for
sudden bursts to the upside and downside.  Those events will be captured with
Bingo, Phoenix, Eureka and Bango.  In the words of the song “Bingo, Bango, Bongo
I’m so happy in the jungle I refuse to go!”

Best Regards, Ian.

A faithful supporter writes “Ron, I haven’t had a single message appear
since Mar 10.  Can this be with such a significant rally since then?”

Ron is basking in the sun in sunny Florida before he heads west to bask
in the sun in sunny Palos Verdes.  The forecast is for Sunny Weather and
75 degrees, but the nights get chilly, so bring a warm sweater.

The newsletter is out and several people are getting ready to descend on
us here, while we feverishly prepare the presentations for next weekend.
Thanks to your support we have a decent quorum, but still have a few vacant
seats if you  care to come at the last minute.

When the bulletin board goes this quiet or the once a month Saturday Meeting
attendance goes down, that is usually a good sign that the market has
bottomed and we are due for a decent rally.  However, we must remember
that the public at large has gone through Anxiety, Denial, Fear, Desperation,
Panic, Capitulation and are now on the borders of Despondency and
Depression.  So there is naturally a good deal of skepticism that this is
nothing more than an oversold bounce or a Bear Trap which is waiting to
spring loose shortly.

When things get this bad, the market can catch everyone asleep at the
switch and take off.  That is the Hope, but Relief can only come when a 12%
Rally turns into a 25% one and is followed quickly by a 40% one.  Until then
there is little Hope for Optimism turning to Excitement, Thrill and Euphoria.

At present, there are only two types of Investor who can make good money
…those that trade in moments both ways and those that trade intra-day and
are lucky if the market finishes on a high at the end of the day.  Swing Traders
usually get slaughtered and Buy and Hold types are safely tucked away in
their foxholes.  Again, we can tell since many of the faithful supporters who
have religiously attended the seminars are staying away waiting patiently for
the all clear sign.  However, this is precisely the time when they should be
spending their hard-earned money on learning how and when to pounce.

The message learned is that “Emotion Rules the Market”.  It is the cyclical
nature of Optimism to Greed to Fear and Hope.  It is the Psychology of the
Market which is Key.  Ron and I will teach you that the HGSI software is in
lock step with this message and that you will learn to make more money,
keep the money you earned and have fun.  We will look forward to seeing
you in less than a week.  Have a safe journey, and may all your “bets” be winners!

Late Breaking News – We have had a confirmed rally…how long it will last in
this skittish Market is another story for another day.

Best Regards, Ian

I am very busy preparing for the HGS Investor Seminar in less than two weeks,
so this will be short, but carries the message with the two pictures I have
developed for your review.  Since February 10th, 2009 the Market has spoken
and in a nutshell the key reasons are as follows:

Who can forget the 381 point drop when he had little to say but platitudes?
There has been no real solution to the banking crisis problem and this in turn has raised the stakes for Main Street:  layoffs, Jobs, Jobs, Jobs and 401-K’s.

Of course there are several factors, but Rome has been burning since Feb 10.
Don’t ever forget that Main Street is locked at the hip to Wall Street, and what
we have seen this past month proves it yet again, as I  have shown several times
last year and the year before on this very blog.  What the Administration, the
Treasury Secretary, the Fed and the Congress say is vital to the daily moves
in the stock market regardless of whether it is a Democrat or Republican in
the White House.  Is it any wonder there is no Confidence or Trust?

So what do we have today?  Barney Frank to the rescue on the Mark to Market
and Up Tick Rules…which they have been considering for over a year and now
were forced to say something to prop this market up.  Will his musings all be forgotten in a month?  Where was Chris Cox all last year on this issue?  Only intra-day traders need apply to make money in this crazy market.

The message is loud and clear.  Clear your profits off the table DAILY, and just
play in the direction of the latest EVENT relating to the Economy and the Market,
but be ready to switch from Bull to Bear and vice-versa from moment to moment.

Best Regards, Ian.