Ian Woodward's Investing Blog

When the Market goes into oscillation as it did last week, many just throw up their hands and go fishing.  However, with Volatility back in full force, those who are good at playing both ways and can turn on a dime make good money though I am sure it is both exhilarating and exhausting.

It goes without saying that next week will be critical as we try to read the tea-leaves as to whether the Bulls can regain control or the Bears have it firmly in their grasp and are taking this Market into a reasonable correction.  The chart below shows that the simple red and green count of +1 and -1, respectively shows more minuses than plusses.  The Weekly Bongo is still showing Green but as we well know that is by design a longer term indicator and is the last to either turn green or roll over and turn to red.  Note that the Russell 2000 (RUT) and the Semiconductor Index (SOX) have been neck and neck in rising above all other Major Indexes, but the higher they go the bigger the fall, and as you can see from the slope down from their peaks a couple of weeks ago they have been the hardest hit.

I introduced the Game Plan concept at the March 2009 Seminar of Higher Highs and Higher Lows to make it easy for us to follow when the Rally was strong and when it might falter.  It is still intact, but I show you that the lines in the sand all congregate around the convenient and easy number to remember of 1000.  Below that the famous Line in the Sand of -8%  from High to Low is broken and the correction becomes serious and the Saw Tooth Game Plan is in jeapordy.

As attendees at the Seminar know well by now, I always give them Rules of Thumb which are golden and here is one set which establishes the degree of severity as we move from a Minor Correction to a Bear Market.  Of course anything more severe than the 27% shown gets to be godzilla proportions, but even that requires a 38% return to just get back to even.  Imagine 50% down requires your portfolio to come back 100% before you are back to the 2007 levels you enjoyed and you will understand how important it is to preserve your capital during a serious correction:

In the next chart I have combined the thoughts of the two previous charts as well as thrown in one which I do not normally pay a lot of attention to, shown as “R2 is @ 1077”.  We gave you the link in “Useful Financial Websites” at my pivots…it takes the mystery out of this stuff.  The main reason for putting that on the chart is to know where the Gann and Elliott Wave thinkers sit, and isn’t it interesting this level is right at where a Head and Shoulders Top would be trumpeted should the Bulls try to recover their control…a potential Bull Trap.

The conclusion I come to is that we are essentially at the halfway point of a Bull or a Bear Trap, so be very careful how you commit unless you are prepared to turn on a dime and are equally comfortable going both ways.  From the above chart we can see that with the S&P 500 at 1036 it is 41 points to 1077 for the Bull Trap and 36 points to 1000, for the Bear Trap, where 77% of all S&P Corrections turn back up.  Of course if it breaks 991, the Bears win and we head down further to an Intermediate Correction.

There are two sides to the thinking of the Composite Man at this stage, and make no bones about it the Big Players control the direction:

A.  Camp Sunshine says “Who wants to sell?  No Fund Manager or Hedge Fund wants to sell here.  There are big bonuses waiting 8 weeks away…hold the line, and no one sells and everyone is happy”. i.e., the Santa Claus Rally and the Nov/Dec best months scenario. 

B.  The Gloom and Doom Camp’s case, is two fold:

1.  This Rally is running on fumes and there is little more to fuel it now that the bulk of the Earnings Reports are out, and we have had yet another large Bank failure this weekend to boot, and

2.  The 10% Unemployment is the Millstone and must come down to reduce the Fear.  It’s back to the same old song – Jobs, Jobs, Jobs.

Is all that an oversimplification?  Sure it is.  When will we know this current Bull Market rally in a Consolidation Phase is over?  When the Composite Man decides there is a disconnect between the Stock Market and the Job Market.

Since this past week has the Bears in command I felt it would be worthwhile to show how they have gained control in just one week since the Seminar.  It is striking:

The HGSI Team thanks you for your continued support and the fun we all had this time last week at the Seminar, some of which I tried to capture in this note.

Best Regards, Ian.

Make no mistake about it, the Bears are sharpening their lists and are ready to dance.  Type 3 Swing Traders are confused and naturally when things get to a crossroads, they finish up caught on the wrong side of the Market. 

As my Kiwi friend Keith from New Zealand says in part “…the market volatility is making us all day traders…all I have time for and due to my location, is weekly position taking so am looking for a way I can do this (in futures and options as well as stocks) without getting my ass spanked…any thoughts?”

My response: “Keith, my Kiwi friend:  I am afraid to say with Weekly Positions “You are in the Fertilizer”.  This market RIGHT NOW is only for Type 1 and at worst Type 2 Moment and Day Traders, respectively.  Type 3’s such as you who are swing traders are getting their butt kicked, unless they have very tight stops and have seen the light…they either turn to being Type 1’s or stay out until the dust settles.  Ron and I and the rest of the gang from the seminar are all in accord, the only place to be right now is in the Camp of “Light Feet”.  I seldom make suggestions, but the wisest thing for you to do is to save your precious earnings and stay out…given your circumstances and since you asked for my thoughts.

Yes, of course, Type 3’s are kicking themselves, because they are a day late and a dollar short, but with the Phoenix as you rightly say triggering three days ago, the Bears have control until further notice (I showed this in the Chart I posted last night in my latest Blog).

Now I know you are eyeing the ARMS (or TRIN as they now call it) and hoping for an Eureka today…if it happens all well and good, but at this stage of the game the BEARS are getting their SHORT CANDIDATES List ready for when they can thump the likes of the Type 3’s and 4’s again.  They are already watching the VOLUME intently for today, and if it is anything but strong, you know the consensus from the “Guru’s” will be that this is a reactionary bounce in an oversold market. 

So what do the Bulls need to thump the Bears?  You got one answer today with the Eureka which is the Bounce Reaction to an oversold market.  The volume could have been stronger for the bounce to show the Bulls had conviction, but it certainly was not putrid.   Two Eurekas in quick succession with strong volume will suggest the Bulls have stiffened up their backbones and are back in control at least for now.  You know the Gann, Elliott Wave, Fibonacci, and any other Measuring Rod Types including myself (but as you know, I keep it simple) will be eyeing support and resistance levels to their heart’s content.” 

After the 13% move up on the VIX the previous day, the fear was in the market, but the market was badly oversold and the sharp bears were looking for a bounce play today as shown below, with the VIX retracing from its big move:

Today’s action on the S&P 500 and VIX suggests the “Large Players” came in late in the day to hold the fort when the Market didn’t crumble around the vulnerable midday period.  The Seminar attendees knew that this Thursday there would be a new POMO (Permanent Open Market Operations) pump by the Fed, and true enough it was $1.936B.

The message is to “Know thy Competition” and then decide to either fight them or join them.  I therefore used Type 3 simple indicators to know where they stand while tying the day’s action to the S&P 500 and the VIX.  There are four points on the chart:

1.  The move up in the S&P 500 coupled with the VIX going down first thing confirmed that the Bounce Play was in full swing for the first part of the day.  Note how it met resistance at the R1 level at 1056.53 in the Elliott Wave good stuff which we showed you where to go at the seminar.  Note the cup and handle formation right at that level, before it pushed up again.

2.  The critical “after lunch” time period suggested that the bulls were wary and the tight Darvas Box on both the S&P 500 and VIX confirmed this as Large Players were probably expecting a drop to confirm that the Bounce was over and stayed out to confirm which way the wind was blowing before they committed to this strong move up by all the Indexes. 

3.  When the Big Guys decided to move in after the market didn’t stall, the S&P 500 finished up close to its Pivot Point at 1070.

4.  As I mentioned above today was POMO Thursday and that probably helped the strong turn around today.  I taught you all that mumbo jumbo at the seminar.

I know it is a trifle frustrating, but keep your powder dry until the Bulls are in control again are my best thoughts right now.  “When will that occur” you ask?  When that score of -6 turns to +3 or better…the road back to Hog Heaven Chart I showed in the previous blog note and in the October Newsletter.  Today’s action took the score back up from -6 to +2 on the NYSE and +1 on the Nasdaq.  Since the Nasdaq has been hardest hit of late, I would suggest you watch it carefully.  But first things first, you need a couple of Eurekas, otherwise get your short list ready and go with Camp Gloom and Doom, as that score will stay negative until there is a new rally.

I’ll leave it there for today as there is a lot to digest and we shall see if there is a follow through on Friday or soon thereafter, or whether we will just have a bounce followed by a continuation of the correction.  A healthy bounce will follow through above 1070 and head back to the old high.  The Jury is out for now.  Stay nimble.

Best Regards, Ian.

Those who are consistent followers will immediately pick up on the Message:

Now take a look at what the VIX has done in the last nine weeks since 8/21/09.  It looked as if there was a fighting chance that the Bulls at long last got the upper hand with force, but it only lasted 10 days since the VIX broke down below 22.  It was too good to last, and here we are at the other end at 27.91:

I plucked the next chart from the recent seminar where I warned that we are by no means out of the woods.  As I am sure you have realized the big swings in the S&P 500 of the % Daily Range (High to Low) used to be from -10% to +10% and commonplace a year ago.  It has now come down to less than 1%, i.e., Volatility and Fear had departed to a high degree lately, except for intra day.  Have “LightFeet” is my warning.

The seminar attendees enjoyed this next chart, which summarizes how the HGSI Indicators keep us on the right side of the Market as we tiptoe through the Minefields and the Tulips.  For those who do not and cannot do detailed analysis due to lack of time and/or interest the following chart provides a very easy way of keeping score.  The total score one can have is plus or minus 8…count the number of windows above and below the Main Window in the middle.  There are five ribbons and %B through the Bandwidth above, and two windows below.  The current score is -6 out of 8, which is twice as bad as it was in the 6/09 to 7/09 period when we had a Market Correction as shown.  Enjoy:

The last picture carries a warning that when the Pendulum swings too hard to the right, be careful of the equal return to the left as Newton’s third law of motion has taught us.  My law of Motion suggests there is a 4th law – All that glitters is not gold as the Monkey said when he relieved himself over a big cliff in the moonlight.

The bottom line is that unless the Bulls can fight back to hold the line at no worse than an 8% correction from the high with the Line in the Sand at 1005, we are headed for the Gloom and Doom Camp.

Thanks to all who attended for making the Seminar memorable and for all your support.

Best Regards, Ian.

I’m working feverishly for the Seminar.  Not enough hours in the day, but I am getting excited to seeing all of you this weekend.  Don’t blame me for the headline, blame my wife!

Here is Late Breaking News as I go to Press:

Ron, George, Matt and I will see you all on Saturday.

Best Regards, Ian.

You thought I had forgotten about you…No, just busy. As I am sure you can tell, Ron and I are feverishly working up a storm for the Seminar in less than two weeks time, and we thank you for your support.  We still have seats available, so sign up if you want to have three days of intense training and fun at the same time.

I have summarized the Market in one chart and the VIX is the Indicator to Watch.  You have seen the chart below several times…and are probably sick to death with it.  I tell you this is the one chart that summarizes the impending action in the market in a nutshell:

The messages are on the chart, but I repeat:

Complacency has Set in – Any Knee Jerk Above 28 is a Strong Warning Sign
                                               – Any Move Below 22 we have a Raging Bull Market

I see the gurus are touting Dow 10,000, and why not, it’s about time.  A break below 22 to the downside on the VIX will do that and more for us. 

If not, the Doom and Gloom Camp will be itching to say “I told you so, this Rally is being manipulated and was moving on fumes.”

Stay “Light on Your Feet”.  Best Regards, Ian.