Ian Woodward's Investing Blog

Despite the gloom and doom we experienced just 6 weeks ago, we have been able to crawl out of a hole slowly but surely to gain over 30% from the Base Low of 667 on the S&P 500.  This is indeed a comforting cushion should we go down in the ensuing correction which is expected to arrive soon if not sooner.   This Bear Market Rally has Centipede Legs as we hop along on our Pogo Sticks:

1.  We are into 2nd qtr. Earnings Reporting, and that invariably dictates a sell off

2.  We are two weeks away from May, which suggests the adage “Go Away in May”

3.  We are in a six week rally and the best  is 8 weeks on the way down from the top

On the other hand all the palaver of the G20 summit is behind us and we experienced five straight weeks of S&P 500 gains, where I last showed you the statistics for  the first four weeks with over 23% up and 27 such occasions over the years since 1929.  Yes, of course it was somewhat with tongue in cheek, but we needed some positive news against all the gloom and doom around us, and as it happened it turned out to be favorable…who says that History doesn’t repeat itself?

Given that we then eked out a fifth week of gains, I might as well continue the theme and show you what Past History might suggest for the following three weeks.  Note that the chart below has its stake in the ground at four weeks and then showed the next week and four weeks later, so that we now have only three weeks more to go to meet the expected range of numbers I have circled in the chart below:

Now to blend Theory with Practice, we should stare at the current Support and Resistance lines that most Technicians would lay on the current S&P 500 chart pattern.  I have long before now made the point that 840, 940 and 1000 were the important lines in the sand on the way up.  Since 840 is now behind us, I raised the bar to 875, 940 and 1000 as shown on the chart below:

As I am sure you will recall, all great rallies rise above the 17-dma, and  given that it has pierced up through the 50-dma, when they fail the fallback is to that level.  The Line where key decisions must be made is at 790 but certainly at 780 which was the bottom of the 1st leg of the Saw Tooth Plan.  Net-net, the Market  has played right into our hands and there are no excuses for type 3 swing traders who have been nibbling.   All these numbers are within the ballpark of the Past History Chart above!  Enjoy.

Best Regards, Ian.

After four weeks in a row with the stock market up, the question on our minds is what happens this coming week?

Fortunately I found some statistics that shed light on this question.  Sad to say that the odds based on past history is almost a toss of the coin, as seen by the chart below for those 27 previous occasions where the S&P 500 gained more than 10% in four weeks:

However, we can dig deeper and get a flavor for the boundaries of the move based on
past History and it will be fun to see where we land on this next (fifth) week.

1.  Note that the only two occasions that the S&P gained more than the current 23.28%
over the 4-Week period was in 1932 and 1933 when they rose a humongous 54.20% and 33.85%, respectively.

2.  If you cast your beady eyes down column “C”, you will see there were 13 weeks up
and 14 weeks down…hence the odds of up to down based on history is almost a toss of
the coin or 48:52 to be precise.

3.  But what about the coming week is the big question?  I have separated the positive
and negative weeks into columns “F” and “I”.

4.  Here are the key statistics which I have ringed on the chart:

                                          S&P 500 Current    5th week +ve    5th week -ve
   �
Average S&P 500                     843                       864.33                  827.07

Average % up or down                                           2.53%                  -1.89%

Best & Worst Case S&P 500                                   940.96                  804.05

Best & Worst % up or down                                   11.62%                  -4.62%

The figures would suggest that we will do no worse than dropping to the 50-dma which
is at 790, and a fighting chance to reach the next rung on the ladder at 880 which I
mentioned as the high road scenario in my blog last night.   I have kept the numbers the same as the chart to make for easy reading rather than rounding up.

Best Regards, Ian.     �

The airwaves are full of the fact that this has been the best four week stretch since 1933.  The big question is having delivered over 25% how far can it go?

Since I have been a big QID and QLD Watcher, the factors I have developed to understand the thrust of the Bears and Bulls suggest that the Bears are on their heels for now and have gone a trifle quiet, while the Bulls are flexing their muscles and keeping the ratio of the QID/QLD Total Dollar Volume down to numbers <1.0 and as low as 0.8…not seen before.  So the contrarian view is that the Bears will soon be itching to short.

Better yet, the new beast I have come up with is a decent measure of the thrust of the
rally and as you can see the slope of the rally is still intact.  As long as the red dots stay to
the left of the Yellow Arrow, the rally continues.  if it breaks it significantly to the downside
as it did in May last year, then the rally will be over for now.

Of course, the $64 question is how far can this particular rally go?  Nobody knows, but for
sure we can set yardsticks for what would seem to be reasonable based on past statistics.
The chart below suggests that 17% to 30% are reasonable targets, but that given a major
rally one can aspire to as much as 38% to 50% as seen in the chart.  In this heavily skittish
market that may be a tall order, but realize that the first hurdle has already been
accomplished.

So let’s see what might be reasonable Targets given that the Nasdaq had a breakaway gap
two days ago which bodes well for a continuation of the move…for now.  Now skeptics will
immediately suggest that gaps are usually filled, so of course we must be on our toes that
the tide doesn’t turn sharply, so here are the High, Higher and Highest Roads for the S&P 500 and the Nasdaq, respectively.

On the downside, the areas of support now become straight forward:

1.  The 50-dma for both Indexes at 790 and 1470 for the S&P 500 and Nasdaq, respectively

2.  The critical Lines in the Sand at 741 and 1350, respectively

3.  The final gasp at the Base Low of 667 and 1266, as shown on the charts.  Heaven help us!

It goes without saying that the higher this Rally goes, the more the bears will be itching to
come back with their shorts.  Keep an eye on the VIX.  But more importantly, we must not
forget our pessimistic friends who are saying that the Earnings Reports will be due in full
force in another week for three weeks in a row, and that we will soon be in to May, when
the old adage is “Go away in May” as all will be headed for the Hamptons! 

When all else fails, never forget that >8% down on the S&P 500 is a strong warning that the
gig is up, and it is time to find refuge from the wind in your face!  That number is 776 which
allows for a little break below the 50-dma.

Anyway, we have our beady eyes on the Pessimists who insist we must see a P-E of 10 before we can feel comfortable that a Fresh Bull Rally is underway.  Furthermore, with EPS estimates as low as 40 the gloom and doom scenario suggests we will see the S&P 500 below 600 before we are finished.  I leave you to enjoy the key chart from the March Seminar relating to the Fundamentals, as shown below:

Well there you have it.  I hope those who are attending Dr. Jeffrey Scott’s webinar meeting
tomorrow night will have digested this before the meeting, as this is my contribution to that
event.

Best Regards, Ian.

I couldn’t resist the old Scottish Ditty about taking the High and Low Roads to Loch Lommond:

At the seminar just finished ten days ago, I drummed in the need for all good students of the Market to have a Game Plan.  That Plan must have Stakes in the Ground and Measuring Rods to establish the “Must Achieve” targets for a Type 3 Swing Trader and then a Type 4 Long Term Investor to get excited about engaging their hard earned money in the market.

I think most got the logic of the factors I used and understood they were based on a mix of past experience, proven targets and  Fibonnaci numbers.  I also suggested we review the bidding from time to time to know whether we are on track for Recovery from the doldrums of a near Depression scenario; or whether we will sink back into the abyss to drive below 667 on the S&P 500. 

I gave you the Game Plan just one week ago, but it probably had meaning only to those who attended the seminar.   I will repeat it here just to drive home the key winky winky which indicated that 741, 840, and 940 were key targets of support and resistance to watch:

It is now over one month since we hit the Base Low of 667 on the S&P 500, and Barney Frank came to the rescue with his double barreled speech of “Mark to Market” and “Up Tick Rule”.  I covered that in my Blog of March 10th, 2009.  Whether they ever materialize remains to be seen, but if they do they should be a major boost to the market, especially in reducing the extreme volatility we have endured recently.

My son and his wife are itching to throw the dice and get back in with their 401-K money having been patient and avoided the major downdraft.  So this picture is for them and for those who understand the Saw Tooth Plan I derived for them for “Must Achieve” targets. I can now say that the first leg of the Plan was more than satisfactory as shown on Line 1 of the chart below.  Understand we are still not out of the woods, but it is a good start:

The simple requirements were that the S&P 500 achieve 21% up and no more than 8% down, both Fibonnaci numbers and lots of history to back up the rationale as to why they are key in the scheme of things.  You will see that we achieved 24.9% up and so far if the recent low of two days ago holds we had 6.4% down as seen from the chart.  Please understand that the critical Line in the Sand on the down side is still 741 as I show in the Game Plan Chart above, but at least we have a decent cushion should there be a major negative surprise of yet another 4% drop in one day as we had a couple of days ago. 

Those who attended the seminar will refer to their chart on page 125 and compare it to the chart above.  The current status shows that we have a fighting chance to achieve Line “2”, which I have tweaked to now aspire to the 940 Target which is key.  This target kills two birdswith one stone…the 940 target and over 40% up from the Base Low, which are MUST achieve targets to be assured we continue on the track to Recovery.

Please also note that we can then sustain a 10% downdraft and still maintain the Saw Tooth requirements of Higher Highs and Higher Lows as shown on Line 2 of the Plan.  Likewise, it will keep us above the critical 840 line in the sand, if and when it is achieved.

The bottom line is the next few days will determine the odds for Type 3 Swing Traders or those wanting to take a chance that we are in the throes of a decent Bear Market recovery.  As you have observed I have narrowed my critical search to the information on the four charts below…the S&P 500 Channel that we are in, the VIX which has been ominously high despite the strong move so far, a feel for the Bull vs Bear Momentum as measured by the QID:QLD Total Dollar ratio and lastly its relationship to the Nasdaq which is a new perspective.

The Market is marking time waiting for the outcome from the G 20 meeting in London.  The Prudent play is to Mark Time.  Good Luck whatever you decide, but it is always “Your Call”.

Best Regards, Ian.

As I said in my last blog the market has played into the short term traders and
Type 3 swing traders hands.  The Rally this past month has given the Bulls
breathing room and a cushion above the abyss of 667 for the S&P 500.  As I said
before, that line in the sand is crucial:

1.  When one has five uncontested Eurekas inside 12 days, that suggests the
Big Bulls are beginning to put their money where their mouth is.  They have
tread water these last four days as shown by the chart of the S&P 500 below.
If the S&P 500 breaks down below the lower channel at 815,  the line in the
sand is 741 for any chance of this rally to continue.  That is 11% down from the
rally high of 832 and is as much as they dare give up.  Any further drop and the
rally is suspect if not over.  667 is a strong line in the sand for the Bulls and is the
last stand at the OK Corral.   After that the Market morphs to the depression
scenario once again.

2.  We have now gone sideways on the VIX for two weeks…gone quiet, and
sitting quietly in the 40 to 42 area.  That would seem surprising as I remind you
that the Bulls have charged up 22% from the Base Low during this period.  We
would have expected it to break down below the 40 level by now.

3.  The Fear, though subsided, is still hovering around for the next shoe to drop in
either direction.  It must break to the downside below 40 and head down rapidly
towards 30 for the second leg of the Bear Market Rally to continue. Conversely,
if it drives up rapidly above 45, the fear will be back and the rally will be over for
now.

4.  The Game of Checkers is simple.  We are currently hovering in Square “2”.  The
Bulls want to drive it down to Square “1” while the Bears can’t wait to move to “3”:

5.  As I said in the last blog, the Bulls must break the fear by driving the VIX down
to below 35 and then with luck to 30.

6.  How do we know if the Bulls are winning and have the Bears on the ropes?  There
must not be any Phoenix signal for 50 days from the last one on 03/02/2009 and we
are just half way to that point.  At that stage there is an 80% chance after a small
pullback that the Bear Market Rally is still intact and on its way to achieve a sizable
rally measured as over 40% to 60% from the Base Low of 667.

7.  Conversely there is a 50:50 chance that a Phoenix can appear now, so we are still
in the arena of a toss of the coin that we could trot down.

Net-net, the Messages are:

I.  If the 815 trendline of Lower Lows is penetrated to the downside, it must hold
above 741, preferably above 757, and then move up to go for a second leg up per
the Template I gave you at the seminar.   A strong push up from here is key.

II. At that time Type 3 swing traders may feel they should try to nibble for a move
which could last a further few weeks until the bulk of the Earnings are out by the
first week of May, when the Market traditionally is inclined to swoon. 

III. The street will be watching the EPS reports for the Big Banks for the 1st qtr. and
if they are not positive, the rally will probably fizzle.

IV.  The Big Banks, Technology and Small Caps will probably lead if the EPS reports
are healthy.  If not…back to the foxholes and/or go short.

Best Regards, Ian.