Ian Woodward's Investing Blog

I sat and watched Ghana defeat the USA in the World Cup this afternoon and I guess it adds to my gloom as I try to make sense of what has transpired this past week on the Stock Market.  After surviving a 14.4% correction on the S&P 500 with two Eurekas and Kahunas, it seemed that we were at least headed for a decent rally before we hit resistance at the Heads and Shoulders Top area I warned you about.  It was not to be…we are now sitting with a couple of quick Phoenix Impulse Signals this past week to show that the Bears are once again firmly in control.

The net conclusion is that this market is in Oscillation with Intra-Day, Intra-Week and Inter-Week Volatility the likes of which we haven’t seen since the Black Swan Days of October and November 2008.  It may be a trifle early to be trotting out an old favorite picture at this juncture, but let’s blame it on my mood with the loss in the World Cup. 

I have made good friends through this medium with a man named Billy who lives in Belgium and whose work is second to none, which he shares willingly and helps me understand the very short term trading that is the vogue these days…of necessity.  He has a good sense of where the Large Players are at and the way the wind blows, not withstanding the High Frequency Traders (HTFs) we have to tolerate who can push the market as they please when volume is low.  Just look at the see-saw action with big up and down days this past seven weeks and you will see that this Market is not for the faint of heart.

Those of you who follow my blog regularly have now become accustomed to seeing the value of this next chart as time goes by.  The Red, Orange and Green Bars at the right hand side of the Chart says it all to describe the extreme volatility and echos what we have seen in the frequency of big 1-Day swings in the chart above.  By the way, please understand that these positive and negative Impulse Signals of the ARMS Index (TRIN) coupled with the Kahuna Signals shown in the bottom window are “rare beasts” as they occur at the “Fat Tails” end of the Normal Distribution as John Bollinger calls them.  That is the true value of the chart, i.e., Volatility not seen before in the eleven years of history.

Some people like to see numbers instead of words.  I will warn you please do not write to me and say you can’t see the NUMBERS…that is not my purpose for even sharing this research with you.  My purpose is to show you that we are able to take John Bollinger’s %B and my %B 1-Day Change (Kahuna) to a higher level, by displaying the so-called “Interior Decoration” of  the 10 Market Indexes and its Composite Average for these two factors.  My good friends Bill Roberts and Tom Ellis produced this chart for me and I thank them.  

As you can see the colors speak for themselves where obviously Green means good and covers a %B range for above 0.8, i.e., close to the Upper Bollinger Band, 0.2 to 0.8 is in white where numbers below 0.6 to 0.2 is the area where the stock is potentially vulnerable and is the zone I call “Fakey”.  It ties in with the description on the previous chart, and can turn a potentially good rally on its heels and is an area of caution.  Anything between 0.2 and “0” (zero) is colored Yellow and therefore extreme caution, and below “0” is Red as that means the Index is below the Lower Bollinger Band.

For those whose eyes are rolling in the back of their heads and are only interested in the bottom line, the message is that we have not seen action like this since the MAJOR DISASTER back in Oct-Nov 2008, and the only exception is that so far we have been spared with only a 14.4% correction on the S&P 500.  My point is that with this amount of volatility we have an extremely unstable market and can potentially head down into a Bear Market if there is no Major Bounce and strong rally next week.   Note that the Composite %B for the ten Indexes is at 0.39, and one more Phoenix to the downside will be enough to throw this Market back into the red on the chart.

To add salt to the wounds, just look at the next chart which shows the Industry Group “A” Accumulation and the “E” Distribution and we can see they are both in limbo…a standoff.  “E” Distribution was recently as High as >60 Groups or about 40% of the Groups, but it has retreated after the attempted Rally two weeks ago.

You know me better than to leave you hanging without giving you some feel as to what to look for next week.  Time and time again simple tools have given us the clues.  We have seen the value of the High Jump which accurately gave us the reasonable expectation for when this market would top, which I featured on this blog several moons ago. 

Now my good friend Mike Smith sent me this picture to remind me that it is time to get out the “Low Jump” or Limbo Bar as I like to call it.  It proved valuable during the Black Swan days, so here first is the picture of Chubby Checker doing the Limbo just to remind you of fun times past:

We are close to the -6% line DOWN from the 200-dma to the S&P 500 Index so watch out that it doesn’t go any lower:

…And here is the picture for the 50-dma.  The message is simple, we CANNOT see more than 6 to 7% down, before the floodgates start to open:

Over the past month or so I have focused you on just one stock…AAPL.  Now, I give you the AAPL food chain to enjoy.  As you can see these stocks in this next chart have prospered due to their close ties in providing components to Apple’s product line.  The important thing from this chart is that the Composite Index %B is at 0.69…far higher than the 0.39 I showed you earlier for the Composite of the Market Indexes.  These stocks should be watched carefully next week to see if they hold or give up the ghost.  They are the last vestige of hope for the Bulls, but are vulnerable as they are fat with  profits:

Best Regards, Ian.

The message given today’s debaucle is simple:  Beware the Black Cross Cometh!

With a Phoenix today, the rally is in big jeapordy, unless it is nothing more than game playing by the Big Boys.  Understand I suggested in my last blog that you watch out for Step #3 …the dreaded Head and Shoulders Top! 

The Bulls must step up to the plate tomorrow, otherwise watch out below.  If the 50-dma comes down heavily through the 200-dma on the NYSE, we have a Black Cross, or some call it the Death Cross.  Take your pick.  The other Indexes are not quite there yet, but it could set the mood.

Best Regards, Ian.

Mailbag:  My friend David Elliott wrote:

Ian:  Many moons ago you wrote “Where is the Beef”.  As I remember it was a market that climbed higher on low volume, but eventually failed.  Is our current market similar?

Hope you have a good day.  Why not play golf; the market seems to like it when you do.  David

Well David, you have a good memory and your wish is my command as I watch the U.S. Open at Pebble Beach, along with the Soccer and of course the Lakers, yesterday.  If the Market can do as well after a hard fought series we should gradually see this Market rise out of the ashes.  But you are right…the Volume has been a trifle putrid, but we must have patience as we have only achieved Step 1 of the Recovery.

I hear Hsin saying:  “All Ian’s bullish signals have been fulfilled, so should we be bullish now?”  Short term traders have long since closed out their shorts by and large after that rotten FTD call by our friendly newspaper.  We waited patiently for the two Eurekas and simultaneous Kahunas and the Composite %B >0.50, so yes the requirements for a Rally were met.  However, that does not guarantee a successful Rally, just a start to getting off the bottom.  So Day Traders turned to the long side once they got the second FTD, the earlier the better since the Early Bird catches the worm.

Rome was not built in a Day, and after an Intermediate Correction which has been this deep, i.e., 14.4% from High to Low on the S&P 500, and in this case, we need three steps in all to get out of the woods to a fresh solid rally.  Here is the picture of what was achieved this week:

That’s not bad for a week’s work, but now comes the next step which is harder.   My good friend Dave Baratto reminded me at the March Seminar…”Ian, with all the new good stuff, we are inclined to forget the golden rules of yester-year you have taught us regarding Classic Recoveries”. 

I gave you that Winky-winky in my May 30th Blog, so please go back and see the Chart Pattern.  However, here it is for your convenience, and I have stuck the need on the Right Hand Side of the chart, so that the challenge is perfectly clear:

1.  We must rise at least half-way up the right side of the cup
2.  We must form a handle…Cups without handles will burn you
3.  The 50-day Moving Average must be flat to slightly pointing up
4.  A breakout above the Declining Tops Line (DTL) from the high to the top of the handle, aka…the 405 Freeway.
5.  The 9-dma >17-dma >50-dma with the moving average crossovers

So here is Step #2:

Obviously the longer you wait, the higher the Indexes rise and sooner or later there will be a correction.  So far the Bulls have dodged a bullet as the market has risen at least five days in a row.  One might have expected a correction today being Options Expiration Day, which is certainly a surprise, though nothing should surprise us these days.  The correction can come in two forms, a minor tight move sideways to form the most important requirement in Step #2 which is a “Handle” or the rally fizzles and goes down as a bust.  Don’t forget this:  Handles must of necessity have light volume as a signal that bulls and bears are in agreement on the value of the Index or stock.  Then the breakout must have high volume…mark my words, or it fizzles.

And now we come to Step #3.  This comes with always understanding three Scenarios and recognizing what your Competition is thinking and is up to.  I did it all my career…”Know thy Competition”.  If you are Bullish then at least understand the Bearish Scenario and vice versa.  If the Market has just come out of an Intermediate Correction or worse, you must recognize that the Bears are just waiting to trounce the Bulls, especially if they were trapped themselves on the wrong side of the market.  It goes without saying, but I will say it, that is how the favorite patterns of Double Tops and Head and Shoulders Tops come about especially when they coincide with the 50-dma in the case of the right shoulder!  The higher the Indexes rise towards the 50-dma or 200-dma (whichever applies in this case), the more the skeptics of the move rub their hands, and those who are feint of heart never get in until it is too late.  It’s all a case of Approach, Style and Stomach which is different for each one of us…so here is Step #3:

I didn’t say it was easy, but at least you know what to look for.  Remember this, there is absolutely no harm in establishing Targets which come from the discipline and experience of Stakes in the Ground, Measuring Rods and Rules of Thumb.  That suggests you have done your homework.  Never fall in love with a Scenario, but you will immediately recognize which one the Market is telling you it is on.  The Major Challenges I set have been met, but then that sets the stage for a worthwhile rally, especially as the canary, aka AAPL has more than a dose of oxygen and looks a trifle “Perky” since it is now at a new all-time high.  Don’t stop there…when you see the likes of SNDK and OVTI also trotting off into the sunset, you realize that the food chain is also benefitting. 

We started this with “Where’s the Beef?”…and it remains that way as the conundrum for now;  the higher the market goes without volume the more vulnerable, but it’s the second mouse that gets the cheese in the trap!  Whether that is the Bulls or the Bears remains to be seen.  So far, the Bulls are thankful for small mercies, and the early birds are enjoying the worms.  

 Best Regards, Ian.

In reviewing the Blog Note I wrote yesterday, I realized that the Multi-Taskers might like to see the KISS Approach, so here it is in one slide with the key Messages at the bottom of the picture. 

Others who want to learn how to get to the bottom line or as I call it “So What?”, will always ask “Why?”  So for those who want to dig further to see the rationale the next two slides should do the trick:

…And then there are those who prefer the words instead of the music and look for the “What, the “When” and the “How?”  That is what I gave you yesterday, but to keep it simple for you because “I don’t have time, Ian” here it is in the next two slides:

But before we get too excited about all of the above, I warned you last week that the Volume was pitiful, especially with the likes of the Nasdaq and Russell 2000.  My good friend and partner, Ron Brown, summarized his Weekly Report as follows “The most striking thing about the market rallies on Thursday and Friday was the lack of volume.”  Make a point of catching his valuable weekend movies at:

www.highgrowthstock.com/WeeklyReports

So there you have it just as you get it on all my blog notes, the Newsletters and the Seminars…”The What, the Why, the When, the How and the So What”.  There is no substitute for seeing how your stock portfolio is doing, and then having the appropriate key candidate lists for both the long and the short side.  In the most recent work we have done that is exemplified by the JIRM list, which needs to at least be outperforming the Market Indexes (which it is), and then the fresh list of new candidates which should be providing respectable bases and attractive set-ups.

Please understand that I primarily focus on the Market and Tops Down analysis on this blog, but you ALSO KNOW that I do my homework with what others would call a Bottoms Up approach.  Call it what you wish, the HGSI Software provides the flexibility to fit your Approach, Style, and Stomach…I’ll spare you the acronym!

Lastly, don’t suffer from Analysis Paralysis…get to the “So What” Synthesis quickly.

Best Regards, Ian.

My Mailbag had two notes in response to my last blog on AAPL being the Canary in the Coal Mine and thanks to them for their positive feedback:

Hi Ian !
I am sooo glad that I listened to you –and am grateful for the “wc” Chart. I bailed  on AAPL while I still had a decent return—and am more thankful you still want to help us home-gamers even more!  Becky

In a message dated 06/09/10 10:26:31 Pacific Daylight Time, Michael Kahn writes:
my .02 – Ian nailed this in his blog.  ian wrote: 

“However, I say don’t switch horses in mid-stream.  If this market is to go “DEAD”, AAPL will keel over long before NFLX.   Enjoy!  Ian”

Their comments were four days ago, before the Big Up Day on Thursday where we got the first leg of what we were looking for…an Eureka and a Kahuna Up!  We need a follow through of the same ilk, but for now  “Half a Loaf is Better than no Bread”. 

Things are in the balance as we have already had an Intermediate Correction of 14%, and need to see another boost before we see any signs of recovery.  The shenanigans of early May with the 1000 point drop in a matter of minutes followed by a 400 point recovery caused a major change in the psychology of the market from Optimism to Panic in the ensuing weeks with all that I have previously discussed.  Now the Bears are still in control with the Bulls grasping for Hope.

 Friday’s results finished with a slight gain for the Bulls’ cause to at least hold the line to fight another day.  It has to be called a “disappointing fizzle” as the volume was pitiful and this was nothing but a token hold for the Bulls.  However the Composite %B of the Bollinger Bands for the Market Indexes is now 0.53, which is encouraging, since most successful rallies start from here.  So where do we go from here and what can change this to a positive emotion?  It  requires a double Impulse as we had last Thursday, and in a hurry:

The Major Challenge and Near-term Targets for the Bulls:

1.  We Must have another Eureka and Up Kahuna:  For any sort of recovery out of the mire, early next week must see a follow through with a simultaneous Eureka and Up Kahuna.  Although not perfect in the scheme of things as compared to previous strong rallies, it would be close enough to be acceptable.  Any more will be gravy.
2.  Given the above, the Composite %B will be approaching the Upper Bollinger Band
3.  Volume must be substantially stronger…over 2.5 Billion on the Nasdaq
4.  The VIX must drop another 4 to 5 points to 24
5.  The S&P 500 must deliver a >2% day and take the Index to about 1118…Fat chance say the Bears
6.  The Nasdaq must show Technology leading and a rise to 2320
7.  The DOW needs a 500 point gain to above 10,700
8.  AAPL must rise to above 264

Why even suggest such tough goals?  To show you the magnitude of the Challenge:

1.  Three words…Force SHORT Covering.  The Large Players are not budging.  Even then, the bulls will not be out of the woods, and I suggest you look back on my previous blogs to see why the Bears will again be laying in wait.
2.  Another reason is that June and July are poor months for successful rallies of any consequence, i.e., about 10% up over a five to six week period…thanks to my friend Mike Scott.
3.  The third reason is the THISPIG syndrome is not going away any time soon

Net-net:  Things are in the Balance and we must be patient to see how it plays out early next week.

Last but not least, work with what the market gives you and don’t try to force your views on it.

Best Regards, Ian.