Ian Woodward's Investing Blog

A Follow up to the Centipede Note

I know in this day and age, people are in a hurry and don’t remember to read the comments section at the bottom of each blog note.  Kevin (all the way from the Middle East) wrote a great reminder to me and although I have answered him there, I felt it important to put it here as well to ensure there is no misinterpretation or over optimism on my part in your minds.  In my hurry to not be redundant with the information in the Newsletter, I didn’t give full treatment to the downside scenario, so here it is:

Kevin Says:


Thanks for the timely post. So you are not concerned about the volume falling off or the slope of the price line starting to flatten out? Of course, if I stare hard enough, I can see the 50 DMA has just turned up…, but we are a long way from penetrating the long-term DTL.

Hi Kevin:  Sure, we must always be concerned when a rally is a trifle long in the tooth, and it begins to curl over with volume drying up.  The Newsletter covered all the bases on three different scenarios, so I did not want to be redundant on the “if’s, and’s and but’s”.

But then again all great climbers must pause to refresh, so that a little droopiness is sometimes good before a rally gets a second wind.  Please also realize that last week was a short week with many taking a well deserved holiday in Hawaii or the Hamptons. 

Maybe I should have spent more time on the downside to give a balanced view on where my head is at.  I did that in the Newsletter.  So here it is:

The way to look at the situation is that any point higher than we are at now is gravy, and provides more assurance that we can withstand greater than an 8% correction the higher we go.  My sites are only on the “High Target” as I mentioned on the bottom of the chart, so that 875 only gets us to 31% up from the Base Low, which is hardly reaching for the fences as the other two targets suggest.  It is most unlikely that the DTL 405 Freeway Line which is the Highest Target of over 1000 will be reached on this round without a correction.  However, keep 940 and 1000 in mind for later challenges.

The more important point is what is the ultimate extent of the cushion on the way down, and can it portend to produce an INVERSE Head and Shoulders when all is said and done to set us up for the second true leg of the move back to recovery?  If this rally peters out today, the best we can hope for is to arrest the drop to 8% down to maintain an intact Saw Tooth Plan.

One last point in the scheme of things is the question of defining psychological barriers:

a. 800 on the S&P is #1. We need 875 to hold an 8% drop above that.
b. 8% down is #2, which is the 77% rule of all S&P 500 corrections.
c. 780 is #3 to hold the Saw Tooth alive and to give any hope of an Inverse Head and Shoulders set up for the future.  All the talking heads will be covering that point if and when it arrives.

After that, throw in the towel and run for the hills.

Best Regards, Ian.

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