Ian Woodward's Investing Blog

U.S. stocks were hammered Friday, pushing the Dow industrials to their lowest close since Oct. 11, 2006, after February’s unemployment report cemented thinking of a recession and central bank moves to stem the credit crunch failed to offset the damage. 

• “Folks, based on today’s employment report, if we are not in a recession, it is a darned good imitation of one; we are in an unprecedented real estate and credit crisis that is whipping its way through the U.S. economy,” said Kevin Giddis, managing director, fixed income trading, Morgan Keegan & Co. Dow Jones Industrial Average declined 146.70 points to 11,893.69, giving it a weekly loss of 3%. Since the year began, the blue-chip index has lost more than 1,370 points, declining 10% in value. We are close to a Bear Market with a -18.05% drop from the High on 10/31/2007 to the recent low.  My last blog suggested that if we do not hold at 2203 on the Nasdaq we would trundle down to -30% at 2010, and next week is the final chance for the Bulls to hold the goal-line.   
• At times like these, I revert to my most trusted tool which I call the High Jump, or in this case since the Index is BELOW the 200-dma I refer to it as the Limbo Bar.  It is the % from the 200-dma to the High of the Index, which as you will see from the snapshot below we are currently down -10% and at a critical point based on past history for the S&P 500 looking back to the Major Bear Market from 2000 to 2002.  In staring at the chart below, I couldn’t help but ask if what I see is a coincidence or another case of History does repeat itself in different but similar ways.

   

  

• With that said, I overlaid the next three months of the 2001 dip down to -20% on the Limbo Bar on top of where we are currently and this is what the picture looks like.  It is uncanny to my mind, and although I am not for one moment wishing this on us, it is a wake up call that if the Bulls do not hold here at the current Double Bottom, we are headed down to 1100 before we might see a proper Bounce Play:       

     

• For those of you who are not too familiar with the Value of the High Jump or Limbo Bar, I refer you to the Blog “HGS Investing Principles – The 405 Freeway” written on December 2, 2007, where I discuss this valuable tool when the market is headed for extremes, either Tops or Bottoms.

Best Regards, Ian.

Over several months since the market peaked in October, I have kept account of the critical fights for territory between the bulls and bears, and now we are into round #3.

Round #3 of the Fight at the OK Corral between the Bulls and Bears is fast going to the bears despite the encouraging contra trend rally we experienced. It was still too weak to hold and having broken the triangle to the downside it seems we are headed down again to test the low at 2203. 

It is now very apparent that with today’s action that the odds are high that we will retest the previous low on the Nasdaq at 2203, as we are now just ~ 50 points off that low.  I felt it important to expand the playing field to include a HYPOTHETICAL third leg of a symmetrical triangle as shown in anticipation that at least we are familiar with what it might look like…should it come to pass.  Of course I am game playing, but there is little harm in having a game plan that bounds the Bulls and Bears Scenarios.

Bear Scenario:  Today was an extremely high volume day with 2.7 Billion shares traded on the Nasdaq, with 298 New Lows and only 14 New Highs on the Nasdaq.  With that low New Highs it will take a big positive surprise to turn the sentiment around, and deliver over 150 New Highs to kick start any form of rally.  The Nasdaq eked out a positive gain in the last half hour when Charlie Gasparino once again fed his latest understanding of the hope of an Ambac bailout which yet again took the DOW up to close just down 45 points and bring the Nasdaq back to positive territory having been down over 25 points for most of the day.  INTC’s bleak outlook, GOOG down below the $450 mark and Ben Bernanke speaking at a community banking forum in Orlando, FLA., indicating more foreclosures are expected as the sub-prime lending crisis gets worse, all weighed heavily on the Market all day.

Based on Past History of the Nasdaq Bear Markets since 1973, we already had a -23% drop when we last hit 2203 five weeks ago on January 22.  This drop was the second lowest since 1978 which had -20.37%.  The Average over the 13 Bear Markets is -36.5% so if we are to head down, it would not seem unreasonable to suggest that -30% would be an appropriate next leg down (white arrow).  That would put it only in the lower third of past results, and if and when we get there we can review the bidding further.  A 30% drop would put us close to 2010, which is the Base Low of July 21, 2006 when we first had a taste of the extreme Volatility we have today.  That is depicted by the White Arrow on the chart.

Bull Scenario:  Given that the hope of the Bulls is that capitulation will occur at the double bottom of 2203 and they can muster enough good news to propel them back up on a Bounce Play one more time, the best they can expect at the first instance is a quick repair to 2435 (green arrow), the 50-yard line I show on the chart.  What is significant in the psychology of the market about 2435, you might ask?  You will recall on January 10, 2008, Helicopter Ben gave a speech where he said that the Fed would “Take Substantive Additional Action” and the Stock Market yawned and went rattling down from there as shown on the chart.  That drove the chart down into the second symmetrical triangle.  It has yo-yoed for the past 5 weeks and has completely run out of steam, so the only other potential good news would be an extraordinary rate cut of 50 basis points prior to the March Meeting.

Best Regards, Ian. 

My good friend David Galardi says in his comment on the last blog that short-term Type 1 and 2 traders are suffering from too many anti-acids and bland foods these days, but the Types 3 and 4 are relaxing on the ski slopes and sitting in their fox-holes. The three Scenarios in play are: 

1. Back down to test 2203 on the Nasdaq to form a double bottom and then maybe another attempt at a rally. 
2. The Bears win the fight at the OK Corral #3 and we head down below 2203 to my next target at -30% on the Nasdaq of 2010. 
3. An immediate turn-up today or early this week based on more rumors and/or real news that suggests yet again that all is well.  It wasn’t too encouraging today, but they brought the market back at the end so they may be able to rally it for a few days. This beast is like a lump of jelly these days and I need say no more. 

Different Stomachs enjoy different times: 

• a. Very short-term players equally adept as you on playing the market both ways.  They know their trump card is “Nimble” as you know too well, have the stomach to play the reward/risk throw of the dice, and are making good money on both sides of the market.  They are the Type 1 & 2 traders who are now becoming even more adept in trading in moments, not hours or intra-day.   
• b. Those who have already preserved their Capital and are sitting on the sidelines waiting patiently until we see better signs that the market has truly bottomed.  They accept the tongue in cheek scenario of using the Thick Blue Pencil Technique I use on a few previous notes to cut through to what the market is telling us now.  They are the Type 3 & 4 Investors who usually cannot or do not wish to get their hands burnt one more time on a hot stove, as one of our supporters tells me, and prefer to ski and sharpen their thinking for when the coast is clear. 
• c. Those who are refining their T/A techniques and are finding new avenues to challenge them and use the Yahoo HGSI bb as a great sounding board to determine whether their Gann, EW, Reif, etc can be sharpened further on what has to be a challenging Volatile situation that most will admit have not seen before now and has become the norm.  It’s a friendly place to try out their skills, but heaven help them if their forecasts are not within acceptable tolerance levels, despite the last two moves by the herd, one up and one down based on nothing other than rumor. Amazing that these days a hard earned week’s profits are killed in an hour based on faulty rumor.  But that’s the nature of the beast and the times we live in. 

Only less than one month to the Seminar on March 29 to 31, so hurry up and sign up for the last few seats still available.   Best Regards, Ian. 

1. Who’s He?  He’s the CNBC commentator that specializes in the brokers, banks, and financial industry.  He’s the one that announced ABK “might” get a capital infusion to save their AAA last Friday 30 minutes before the bell which caused the big 10 minute complete reversal that gave everyone a sigh of relief.  He also went on this morning to announce the deal has hit a snag.  What lets him and CNBC off the hook is the words “might” and “snag”.   So much for gurus and it again goes to show that this market is so jittery that it has now become a “Catching a Pop or Short on a positive or negative news story” type of Market.  The constant reporting of rumors that subsequently prove to be incorrect by CNBC requires indignation and scorn for that kind of sensational journalism, yet they are the only game in town. 
2. Unfortunately, it also causes havoc with the Technical Analysis to say nothing of your pocketbook, as certain targets are made or broken based not on solid Market Data; but micro-managing price and volume and time periods made by the herd based on phony news is what it has come down to.   
3. In my blog of a week ago, I said “The good stuff on Symmetrical Triangles is still intact for yet another T/A element to watch for next week.  Unless there is again some follow through tangible information that breaks early next week on this subject to continue to drive the Bears to cover their shorts and possibly force the pattern to the upside, the odds still favor a move to the downside with Lower Highs and Lower Lows.”  Just as well I gave you the reasons to be cautious and also the Late Breaking News viewpoint that my good friend Mike Scott cautioned me on the whims and fancies of symmetrical triangles.  At the expense of being repetitive, Types 1 & 2 Traders can enjoy the Volatility to their hearts content; Types 3 & 4 should be patient, prudent and pounce when things look better.  If you haven’t read the blog on Tea Leaf Reading, that’s where you will find all the good words of wisdom which hopefully will save you money. 
4. Here’s a repeat of the symmetrical triangle picture, and it still says my bias is to the downside.  We are currently at 2271. I have updated it to show that the challenge to retest the Base Low of 2203 is a lot easier than to head back up to 2435 and then 2540 by comparing the green and thin pink arrows.  Please also note that once at -23% at the Base Low, the odds are equal going to 2010 as it is to 2435, the 50-yard line of where I suggest the ball-game is being played, until I see a positive turn around from the current fight at the OK Corral, round #3.

Best regards, Ian.

It couldn’t be timelier for us with the theme of this blog for today, but we had another Eureka signal today which at least gives the Bulls the upper hand for the moment.  U.S. stocks rallied into Monday’s close, spurred by news that Standard & Poor’s reaffirmed the credit ratings of two key bond insurers whose financial outlook has been at the center of investor anxiety in recent months.  This exuberance by the bulls, or maybe it was just short covering by the bears spurred a major move back up to safer territory smack in the middle of the symmetrical triangle I featured in my last blog.  Don’t be surprised if the violent volatility in this market continues with swings of 150 points in the DOW as part of the current climate, which is totally EVENT driven.  However, the thrust of where to fish was correct in the blog of Feb 19 as the fishing pond is in the commodities with the usual suspects delivering wolf pack baskets of 4%/day and more as I showed in that blog.  Stocks with high ERG of >240 are favored. I am sure many of you have heard me say “There are no silver bullets when it comes to Stock Market Indicators…but two lead ones are better than none.”  The HGSI Team is pleased to announce that we now have a complete set. Some of you have seen the notice regarding the High Growth Stock Investor Seminar, but for those who do not get the regular bulletins or may have missed it, here is a repeat of what we sent out this past weekend:       

NEW HGSI CAPABILITY ANNOUNCEMENT:  At the last workshop in October 2007, the attendees enjoyed the introduction of the Hindenburg Omen indicator for identifying imminent tops in the market and saw the first glimpse of the Bingo indicator to signify the possibility of a bottom.  In addition, I explained the dove-tailing with the Eureka signal which we have had available for seven years in the product.

What’s New! There is so much volatility in these markets we know it is difficult to find stocks where you can make some reasonable money and wanted to do something about it for our customers. So we set a goal to produce a complete trading and investing strategy by linking the market indicators to stock indicators that would also signal when stocks may be near a top or bottom. If we could achieve this goal we could teach a complete trading/investing methodology to our HGSI customers. To reach the goal a new stock indicator would need to be designed and it would take some innovative thinking.   What better way to design this indicator than to ask customers who are active in using HGSI every day in creative ways for their trading/investing. So a team of HGSI customer was asked if they would accept the challenge of designing an indicator for stocks that would work with the market indicators.  After several months of detailed work on their part, I am glad to report that they were successful!  What the team came up with has come to be known as Bongo and will be introduced for the first time at the March 2008 workshop as a part of a complete HGSI market-stock trading system. Those who attended the October Seminar will immediately understand that Bongo is the “side-kick” to Bingo!  Maybe I will bring out my Bongo Drums once again to show my appreciation and salute the team for their fine effort.

The team is comprised of Robert Minkowski as the Team Leader, assisted by Jeffrey Scott, Dave Steckler, Lou Powers and David Galardi.  If you read the HGSI Stock Market Forum these customers will not be strangers to you.  All of them will be at the March 29, 30, 31 workshop where attendees can meet and interact with them to find out first hand exactly what they did.  You don’t want to miss the introduction of Bongo!  We still have 10 seats available on a first-come, first-served basis.  Hurry-hurry-hurry!    www.highgrowthstock.com/order 

In Summary, the HGSI product now offers a complete suite of Indicators that compliment Market Phases and Industry and Stock Rotation:

1. Hindenburg Omen with Bongo on the Market and Stocks at Tops  

2. Bingo(s) that indicate one is treading at a Bottom.  Whether it is “a” or “the” bottom is dependent on the severity of the Market decline as it fades from an Intermediate Correction into a Bear Market   

3. Eureka(s) that indicate the Bulls are stirring again with irrational exuberance for a Rally 

4. Bongos that usually follow Eureka for both the Market and Stocks

5. There are always Rotational Opportunities and these are best observed with “Wolf Packs”, Industry Group Rotating up and down, and Bongo gives a heads-up as to when and where to look for potential candidates 

Those of you who have faithfully followed this blog know that the Hindenburg Omen, Bingo and Eureka combination has helped us understand the pulse of the market as I have explained when addressing the various phases in real-time in the various notes.  The subsequent drop in the Market to a Bear Market Correction is also shown evolving ever since my first and subsequent notes on the blog since October.   We now look forward to Eureka and Bongo to give us further insight in this Volatile Market. Best Regards, Ian.