Ian Woodward's Investing Blog

Last night I gave you my latest results of the research I have done using %B x Bandwidth, and it seems that the picture I left you with was too small to understand since it is not enough to trust, but one must verify.  The hour was late and all I got was one response to what I believe is breaking new ground.  However, I see my friends from Qatar are taking note!  Be that as it may, I repeat…You snooze, you lose.

My good friend Chris White has provided me with the tools to show you why I have confidence using his EdgeRater Product, where he does the whole kit and kaboodle for you in a Template.  It doesn’t get any easier and you judge for yourself as I unfold this good stuff step by step as to whether between my work and his tools we may make and save you money by keeping you on the right side of the market…more so than most:

Now to address the one response I got today, which I appreciate:

Ian,
Thank you for your timely blogs to help us stay sane in this crazy market. I increased the size of your last chart in the blog as much as I could (twice) but still cant read the numbers ( 21″ monitor) and what it is saying. Is there any way to blow that up and resend it? Thanks, Bob

Bob, your wish is my command.  Here is a step by step view of the four swaths, starting with the original with all four scrunched together to give you a general view as I did late last night, and then the “Real Proof in the Pudding” or the “So What?” is the fifth swath of %Gain from the day of the Signal.  This first chart showing all four swaths was intended to give you a general view of the inter-relationships, and maintains continuity for you from last night’s blog note:

Now here are the first two Swaths, %B 1-Day Change and %B, and hopefully you can read the numbers this time, when you click on the chart itself which will give you a bigger picture.  Note that when we see a string of Kahunas down or up, as we see on 09/21/2011 and 10/10/2011, respectively, %B essentially changes color in unison

Next we have Swaths 3 and 4, Bandwidth and %B x BW:

If we look at the last line, we see that Bandwidth had mainly the same readings and identical Conditional Color Formatting, while %B x Bandwidth showed that three numbers changed from Green to Yellow, signaling a caution but no major change, implying that although we had a 4&1/2 bucket drop in most Indexes in %B, the Rally was not yet dead!  I have not updated the chart for today’s readings, but as you would expect given that it was a ho-hum positive day the colors for %B x BW improved to just two “yellows” for the NDX and Nasdaq, while the S&P 100 came back to “green”.  I am not for one minute suggesting that the Market is not on shaky ground, which it is, but it is still not dead!

Next, just to prolong the agony, since this is the first time I am walking you through the logic, I show Swath 1 and 4, %B 1-Day Change and %B x BW.  However, you will note that this time I have colored the swaths for 10/05/2011 and 10/06/2011 with a light blue just to draw your attention that although there were no Kahunas on those days, the momentum was still impressive with what I would call 2/3rd. of a Kahuna on both days…remember that a Kahuna is 0.24.  In other words we see three days in a row with strong Momentum from 10/04 to 10/06, which resulted in %B x BW changing color to “Green”, implying that the signal that recovery with a New Rally was confirmed on 10/05/2011.  Obviously by 10/10/2011 when we had another strong swath of Kahunas, the %B x BW was sitting with four days of solid green.  Please understand that the Follow Through Day was not signalled until 10/12/2011 which was two days later.

You might well be asking when does this process signal that the market has turned back to a Bear Market or that the Rally is dead…I would want to see at least six of the Market Indexes turn to Yellow/Red for %B x BW.  Likewise, I am equally sure that you are saying “So What?”  The answer is on the next swath which shows the %B x BW together with the actual Index close prices, which comes back to my opening picture of “You Snooze, You Lose!”

The So What is that with the process I have shown you you stood to double your gains at the peak, between friends, over the FTD system.  Yes, of course, the Market is under pressure…it ought to be after a ~5 Bucket drop and it will take good news out of Europe and momentum buying from the Large Players or we head down into the doldrums.  I have always taught you to watch the Canaries in the Coal Mine and my charts of four Market Indexes in the previous Blog gave you the picture that we are flirting with the lower support levels too close for comfort.  But, for tonight to round this blog note off, let’s just look at the “Go To Canary”, AAPL, and you will see that it is Gasping and nearly out for the count!

So there you have it.  We will see how useful this is going forward.  We are at a critical point, but not yet out for the count!

Best Regards, Ian.

With the Yo-Yo Market we have tolerated these last several months, I feel that No Longer do we need the Blind leading the Blind for Short & Long Term Market Direction.

With the Help of Chris White, the CEO of EdgeRater, we now have a Template that will make life a lot easier with the introduction of a new gem which I have conjured up to find an “Edge” with %B x Bandwidth.  We will need to watch this phenomenon to be absolutely certain, but on a Day like today, there is no better time than now to introduce this new concept.  I will save that gem till the last chart in this note, but thank Chris for this improvement in the EdgeRater Template for Major Market Indexes, which makes life easy for EdgeRater and HGSI Software Users:

But, let’s first take a look at the hairy edge the Market Indexes are at given a huge down day from the Italy debacle.  They are all within a hairs breadth of breaking the Major Support level I described in an earlier Blog Note.

If we zero in on the Nasdaq, we see that the previous five days gains were all wiped out by today’s major drop:

The Nasdaq along with the other Indexes took a major dumming today, ending up with a %B of 0.27…precariously low:

When things get really rough, always turn to the “Go To Canary” in the Coal Mine…AAPL:

This next chart shows the Four Plus Buckets down we suffered today.  Please Note all the Red Arrows at the Bottom of the Chart.  So far we have had nine days from the high, so the Signal of “within 12 days that the Drummers are drumming” for an expected correction seems to have come through once again.

The Hockey Stick formation has formed so far, but it is obvious it is in jeapordy and tomorrow will determine whether %B breaks down through the bandwidth or can hold and return to its original glory of staying above the Middle Bollinger Band, with %B >0.5:

…And last but not least, here is the chart I promised you at the beginning.  Study it well and let’s follow what transpires:

Many thanks to Chris White for this Template which makes life easy to follow with regard to Market Direction with hopefully the earliest calls both up and down.  Note the Kahunas on the Left in Red and Blue coupled with the change in color with %B x Bandwidth on the right hand swath for the earliest calls.

Best Regards, Ian.

With the Constant Yo-Yo we are tolerating of three to four days up and down in the Stock Market these days, the only worthwhile Game Plan is to play it both ways to that tune.  The Large Players don’t want to see this Market fall right now, especially when they can taste their bonuses.  Yet the Global status of the Debt Crisis pokes its head up every few days to trot the market down.

Seasonality suggests we now look forward to the Thanksgiving and Santa Claus Rally, and that is not a bridge too far.  However, the Greek and Super Committee gang of twelve provide the current dark clouds to potentially spoil the fun.

The Bucket Brigade is still flying high to keep you on the right side of the Market since the Rally began.  The twelve Drummers Drumming Scenario is half way with a count of six.  For those who do not recall, the market will break %B 0.5, or the Middle Bollinger Band or the 20-dma line…take your pick, usually within twelve days.  When the internals are this strong, any correction is short lived unless there is a Major Surprise of negative news.  We are back in safe territory sitting with %B of the S&P 1500 at 0.72, so we have a decent cushion.  We want to see the Index trot up higher and beat the recent 0.98 reading on 10/27/2011 for the count to get reset.  I’m sure you know how to read this chart by now…Arms ratios on the Left, Bollinger in the Middle and W&B on the right, but the latest “Good Stuff” is in Red circled in Blue :

So here is the Game Plan for the OPTIMISTIC Scenario that takes us into the New Year.  In a couple of words “Hockey Stick”:

Net-net:  As long as %B for all the Indexes, of which the S&P 1500 is a typical Surrogate, stays above 0.5 and preferably 0.7 the Rally is safe and we head into a Santa Claus Rally.

Best Regards, Ian.

Tonight as I write this note after two big down days in the Market, the Rally is on the hairy edge.  The Diva is Rehearsing, but not Singing yet!

The following three charts are self explanatory to explain why this Market must respond strongly to the upside Tomorrow to keep the spark alive:

Now let’s turn our attention to where the DJIA, S&P 500, Nasdaq and NYSE sit relative to their Critical Support Levels:

Let’s look at them one at a time to understand the degree of “Cushion” each has before the floodgates open to the downside.  Here is the DJIA:

The S&P 500 also has a Cushion, as we watch critical support and the distance from the high of -8% for the point at which the Index must turn up:

The Nasdaq is at the Critical Level…any lower and it will be the Canary in the Coal Mine that has rolled over first of the four Indexes featured:

…And lastly we have the NYSE which like the DJIA and S&P 500 have Cushion.  So we have three still safe and one in jeopardy:

So there you have it, with Canaries in the Coal Mine, %B at a Critical Level, and needing a Strong Bounce starting tomorrow or this Rally is finished for now.

Best Regards, Ian.

Since we have learned in this last year that the Stock Market is mainly News Driven more so than in previous years, any sustained Rally coming out of an explosive move we have experienced these past 3&1/2 weeks is highly unlikely to last as long as the Days of Wine and Roses ala March 2009.  If you do not pay attention to what is due up by way of news to say nothing of the surprises we get every other day, then most Type 3 & 4 Intermediate and Long Term Investors will get killed.  The next big day to mark on your Calendar is November 23rd., the day before Thanksgiving, when the Super Committee MUST deliver the goods on the Debt Crisis Issue.

With that as an introduction, Paul has a follow up question to my note of yesterday:

Paul R Says:

October 29th, 2011 at 7:10 pm

Wow Ian great blog and answer to my question.

Here is another question for you, looking at the .97 %B average and the band of drummers warming up, for a decent sustained rally what %b range would you like to see each evening?

Paul R

Hi Paul:  Now you want “Jam on it?”, as my Mother used to say when I was a little boy as she gave me Tea and Crumpets.  I’m no Soothsayer, but I can give you a feel for what to look for.  Using the Benchmark of the Strongest Rally in the last three years when the Market exploded upwards on March 10, 2009, we see:

1.  Once the Composite Average for ten Market Indexes reaches a peak, it stays above 0.80 for four days before it descends to 0.60 to 0.80
2.  If the Rally is very strong, Composite %B can stay above 0.60 for a Month, dip briefly with a Phoenix and three to four buckets down in one day (Major Down Kahuna), and then survive for another month, as shown below:

Likewise, all of this can be followed by all Users of the HGSI software as shown in the chart below:

3.  The more normal rise and fall is that a Rally will stay up above 0.80 for four days and then gradually fade to BELOW 0.50 within 12 Days from the peak…hence Twelve Drummers Drumming.
4.  The earliest clue that the Market is Correcting again is when %B for the S&P 1500 registers >16% in Bucket 0.6 to 0.7, hence my statement of 12 Drummers Drumming and Sweet Sixteen!  (Seminar Attendees need to review the omnibus set of slides for March 2011, where you will find chapter and verse on this towards the end on Pages 369 to 388.  The Section is called “Defining Market Tops with %B and Bucketology using the S&P 1500”).  For those who read this blog, you can find references to this concept in Blog Notes dated November 5th. and 6th, 2010.

…And here is a sample of what to look for, and please note the red circle in the middle of the chart around Bucket 0.6 to 0.7 for the “sweet sixteen” which is the earliest clue that the Market may start to deteriorate:

No one can predict what the Market will do, and I can only give you clues of what to look for as the Market tells you which path it is on, day by day, week by week until we get to Thanksgiving Turkey.  Then comes the Santa Claus Rally to look forward to, so there is hope if the Super Committee can come up with good news.

Let me turn the tables on you and anyone else who cares to chirp up…please give me the heads up of what you see as things unfold in the next three weeks as to which way the Wind is blowing ahead of a Catastrophic Failure or a Pleasant Surprise and you will be a better man than I Gunga Din!

Best Regards, Ian.