Ian Woodward's Investing Blog

Stock Market: Weak Bounce Leaves Bears Dancing

I dug up an old favorite picture I use at times like this where the market is very “iffy”as to whether it can recoup:

…And then to give you perspective as to why, I have thrown in another theme for you to reflect on as to whether a long Pause to Refresh is due:

Here is the reason for my dismay in today’s feeble attempt at a Bounce Play.  It was due after six down days, but it tailed off in the last hour or so with rather pathetic volume overall despite that it finished up about 0.4% on the Nasdaq:

So, it is time to think about the Thin Blue Pencil Line to be aware of Lower Highs and Lower Lows:

I have dusted off the Road Map to Hog Heaven Chart which was so helpful in 2009/2010 and it shows the Rally has come a long way on its March to Tipperary:

In the next chart I pull my usual trick of doing a “What If”, by looking back to the most recent big correction and pasting the chart pattern at the end of the chart as shown.  It won’t happen exactly like that if the market is to fall further, but you get the concept:

Any further than this to the downside can do much damage to your 401K, so you know the drill by now.  The Russell 2000 is a good chart to keep a beady eye on as if it gets below 750 we might look forward to serious damage:

Understand there is more to this “Good Stuff” than Bucketology, but now for a dose of that to show the two go hand-in-glove.  We see we are now in “Correction” territory, and dangerously close to the Line in the Sand of 291.40 despite the bounce to 298.56:

Now here we have a conundrum and if you have any other bright ideas besides the scenarios I have postulated, let me know:

My concern is that with the anaemic bounce by the end of day which started off with a good deal of promise will not last long:

…And finally one chart on Learning your ABCDE’s that I have dusted off.  I learned this trick from a good “friend” I know as Billy whom I have never met but has taught me how to apply bias to the Industry Group count of Acc/Dist.  I tip my hat to his work:

You can see that the Industry Groups are getting weaker but have not reached bottom as yet.  Beware of Fakey’s when it comes to bounce plays.  Even past solid bounces that take %B up into the safe zone of 0.7 and above have been known to fail.  It is obvious that the general mood in the market has changed, and it will take a miracle to lift things up out of the mire from all the factors that are in play right now.  But, then again the market climbs a wall of fear so keep an eye on the few remaining stars like NFLX that now becomes the Canary in the Coal-Mine.

Best Regards, Ian.

4 Responses to “Stock Market: Weak Bounce Leaves Bears Dancing”

  1. Paul R Says:

    Ian,

    In the olden days I would have grabbed up a few longs thinking we had hit bottom, yesterday I just sipped my iced tea and watched the tape crawl by thinking I need proof. Show me some real proof! Thanks for giving us the tools and confidence to analyze this shell game! Lemon for your tea Ian?

  2. RichardB Says:

    “Any further than this to the downside can do much damage to your 401K, so you know the drill by now”.

    I’m sure the answer should be obvious, but what would the best drill be, please?

    Thanks again so much for these blogs.

    RB

  3. Charlie Willey Says:

    Ian – The chart NAZDAQ with ABCDE Reverse Scores is a very interesting chart. Just from a glance I am seeing a bit of Forwarned is Forarmed for anticipating bottoms as you have discussed.

    You have a red dotted line drawn at about 1.40 on the Reverse Score column. Is the line drawn there to accomodate some risk value or do you think any penetration of the horizontal blue box will suffice as a warning?

    Or am I off track here?

    – Charlie Willey

  4. ian Says:

    Hi RichardB and Charlie:

    As usual you are on the ball!

    1. Red dotted line at about 1.40…Worst Case Scenario ala Black Swan Days. It suggests to me that although there should be a bounce at that level, the worst is not over, particularly if on the Bounce it can’t get above 2.25 on the score. Note that it took four tries from that 1.40 level together with a lot of pain before the doom and gloom had worked itself off. So, the best one can do at that level is to be very nimble and essentially day trade or at most a few days to a week…Type 1 and 2 Types enjoy volatility.

    2. Penetration of the Blue Box to the level of the blue dotted portion within that box suggests that we should sharpen our pencils for a Bounce Play, and the odds are that although the correction may not be over,the likelihood is that if it retests down to the 1.50 score level the chances are that we will be spared a BEAR MARKET. The worst we should expect is a Major Correction of between 16% to 20%, similar to the finish of the Flash Crah ultimate drop of ~17%.

    3. Today’s action should take us into the blue dotted area within the blue box, unless it comes roaring back in the last hour of trading. Where we go from there is in the lap of the gods and the Large Players…you and I know it is all a big game, but if it goes down further then the cushion we have is ~50 points to reach the Thin Blue Pencil Target of 2600.

    4. We then have to watch for “Lower Lows and Lower Highs”, and if that is breached after a further tepid oversold bounce then we are headed for the red dotted line and you better take care of your 401K before it becomes a 401 Keg!

    5. Last but not least, I am NOT a Fearmonger, but there comes a time when commonsense over rules the heart and it is time to take action before there is a total downdraft…in which case it is invariably too late. When is that point you ask? it is right there in the blog on the Russell 2000 chart. If that beast breaks 750 it will for sure be 401 keg time.

    I aim to put your questions and this answer up on the Blog instead of hiding it here in the Comments which may be missed.

    Best regards, Ian.

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