Ian Woodward's Investing Blog

After just five weeks of turmoil, grief, and then joy who would have thought that we are just a stones throw from reaching a double top on the Market Indexes.  Never count your chickens before they are hatched, but I thought you would enjoy a view from the Top of Mount Everest.  Having planted a flag in one of the earlier notes to declare the Bulls as winners of Round #1, which was to get above the Major Line in the Sand for the Nasdaq above the 50-dma, our next objective is to hit double tops or better on the Indexes and earn that view while sitting on top of the world.   Before we look at that challenge, let’s review the bidding on “Whence we have come from” and what we have learned. 

1. .  After a recovery from a low, we need to plant the Base Low.  That is the starting point for the next leg.  If it fails we uproot the Stake in the Ground, but once we get into new high territory, it becomes the New Base Low.  That Base Low for the Nasdaq is 2387 and for the S&P 500 is 1371.
2. Recall I said that “V” bottoms are very rare, but this time we had one.  Every single one of us were waiting for a retest of the lows, but in marched the Grand Old Duke of York, Ben Bernanke with not one but two magic wands.  The lesson learned is to never underestimate what the Fed will do, especially when it comes to propping up the Financial Industry.  For sure the Bears feel cheated, but their day will come later.   
3. We need to step back one phase and recognize that the big hue and cry was that we hadn’t had a 10% correction in over four years and once we reached a climax run to the top, it was painfully obvious that with all the media hype that correction had to be achieved.  Please understand that the ground rules for measuring the correction is from the IMPRINT High to the IMPRINT low and not from Close to Close.  So as far as I am concerned that requirement has been met as we had an 11.7% correction on the S&P 500, which was all the folklore fuss was about in the first place.  For the record, the Nasdaq had a 12.4% correction, which as we well know also meets the criteria of an Intermediate Correction.
4. What we also learned is that if one is to have a V bottom then we need to see a reverse Head and Shoulders, which is the strongest formation one can have to battle the possibility of a double bottom.  You will recall I showed you that with my Sherlock Holmes Flyspecking picture. 
5. Now I know that many of us did not want to test the waters especially as I emphasized that we had never had so many days with 200 points up and then down and then up again all within the span of a week.  I called it a yo-yo market.  Don’t forget this clue…a low above a low above a low is usually a sign that the market is repairing and when you have the same of three higher highs then for sure it is time to pull the trigger.   
6. Another objective is to make sure that the Market Indexes are above the 50-dma, and then select the one index which has exploded up the best, in this case it was the Nasdaq 100 (NDX).  Once you have spotted that, focus on why and go with the leaders.  The reason is that with the reduction in rates the dollar was weak and therefore favored Large Cap Multinationals, and since the Financials had been trashed there was need for Technology to take up the slack.  Besides, I am sure you will recall that the second quarter EPS reports for the usual suspects were excellent such as RIMM, GOOG, AAPL, CSCO, etc. 
7. We learned that successful Bounce Plays need to achieve at least 10% to 11% before there is a hope that the Indexes have a chance to recover from an Intermediate Correction.   
8. Along the way we learnt the value of spotting Wolf Packs, and that if you are patient one can make >15% in a month which is not shabby.  Likewise, it is wise to pick stocks that have decent ERG but are true leaders with an RS of 87 or greater.  We proved that with the Game Plan Index.  
9. Anyone who hasn’t participated in this rally is now scratching their heads since they are staring at double tops which are not far away. With that big boost from Bernanke when the Nasdaq and all the other Indexes had a huge up day on September 18 with the Nasdaq hoisting a Flagpole of nearly 70 points, it was only natural to expect the makings of a flag, i.e., a pause to refresh with the Market Indexes going sideways for the past four days to all intents and purposes.   

The Upside Scenario: I recently reminded you that the Requirements for the next round for the Bulls to continue to win are:      

•  Drive to the old high at 2725.  The Nasdaq is currently at 2683.    
• Stay above the 50-dma on the downside which is at 2589. 

After a brief pause to refresh, the Nasdaq must drive above the old high for the new bull run to be fully underway.  The Lines in the Sand are between 2589 and 2725 for Round #2.     The second leg of a High Tight Flag is a minimum of 70% of the first leg, and since we are but 57 points away, that next target of 2725 is certainly reachable.  Beyond that, we also know how to apply the High Jump Rules of Thumb for both Stocks and Indexes.  The most important one at this time is 10% up from the 200-dma on the Nasdaq which takes us to 2775.  Therefore the odds are that if this Market runs up the second leg of a High Tight Flag that the correction will occur somewhere between the Old High of 2725 and the 10% High Jump of 2775. 

The Downside Scenario: Unless the Nasdaq breaks 2589 on the downside, this market remains bullish.  Note how the 50-dma now becomes the first line of defense and once broken then one resets the target to the 200-dma at 2523 and then the Base Low of 2387.  Likewise with the S&P 500, the three downside lines in the sand are at the 50-dma at 1480, then the 200-dma at 1454 and lastly the New Base Low of 1371.  Looking at the numbers for the 50-dma and 200-dma of 1480 and 1465 shows there is strong support now at that level, and any breakdown below this would be viewed as significant.   

I gave you the entire process in the blog called “The Road to Success – Following the Signposts” including the Road Map for the various scenarios, so use it and come up with the equivalent for the Nasdaq and now you are golden.  The Market tells you which road we are on, and not you trying to dictate where you wish it to go.  It’s not difficult if you stick to these Principles of High Growth Stock Investing.

Summary Simplified Plan:

Best Regards, Ian

Since my associate Ron Brown is basking in the sun in Italy, I thought I would give you a bonus this weekend to get your jollies (hopes) up and help you through withdrawal symptoms while he is away for the next two weeks.   Following up on my note of yesterday, here are two Wolf Packs to Watch for this coming week.  In the view above, I show the Energy Drilling which has a Ian Slow of 60, but note that its 3 week % Chg is much higher at 82.  Likewise, as you can see from the colors, the momentum has been increasing during the last three weeks.  Below that I show the same two views for Internet Software, and here again you can see that although the Ian Slow Rel Str is 67, the % Chg for three weeks is a healthy 90.  

In the views below, I have identified ten stocks from each group.  Please don’t get excited if your screens don’t turn up the same stocks…just go with the flow.  My suggestion is to pop these two Groups of ten stocks each in Quote Tracker or E-Signal, or Trade Station or whatever other real-time software you have and watch them relative to the Market.  If they are healthy then you know what to do.  If they are not moving wait for another day and see if they go then.  If the Market is rotten and these groups don’t go, it’s a busted play and you have lost nothing!  More importantly, the purpose of this exercise is to see if these are the right Wolf Packs for this week and if the concept works as a general rule.  It’s always “Your Call”.  The most important point is that all of this is only possible using the unique tools we have in the HGSI Software.   

Best regards, Ian

Four weeks ago I showed you the value of finding a Wolf Pack, stocks that were moving in a group, and I gave you a pack of ten to watch.  One month later I bring them back to show you it wasn’t just a pretty picture, but that this Wolf Pack of Chemical Specialty turned up trumps. 17% in a month with all positive and seven of the ten producing >16% is impressive.  Enjoy your weekend and sharpen your pencils to find the next wolf pack.  It’s easy in HGSI.   Best regards, Ian.

Since it is a relatively quiet day in the Stock Market, I felt I might discuss my approach to High Growth Stock Investing to keep it simple.  I am reminded by a good friend of mine, Mike Scott, who said to me “Ian, you taught me one thing that has improved my Investing Habits and Success enormously and that is to follow the signposts.”   

I realize that Blogs are places where people go to get ideas and with Investing Blogs one is looking for “tips”.  That’s not my style.  I teach you how to fish “My Way”, but seldom if ever catch a fish for you.  Rather, I prefer to show you where the fishpond is and show you by example where the liveliest and biggest fish are waiting to be caught.   Hopefully in the course of the last eight weeks you have begun to see my approach to solving complex problems by dissecting them in threes.  It has worked all my life and it is not too late for you to use the underlying Principles of High Growth Stock Investing.  Here are the pieces of the approach that are most pertinent given that you have been following along in how I tackle problem solving relevant to the stock market: 

1. The Plan must always consist of three Scenarios, the High Road, the Low Road and the Middle Road.  The worst thing one can do is to have a single plan based on your bias, as the market will either surprise you or fool you or both.  Assessing three alternatives eliminates the element of surprise to a large extent.   
2. The Targets one sets for the three roads must be challenging but reasonable based on past experience.  They become the Stakes in the Ground from which you measure progress over time.  History seldom repeats itself in precisely the same way, but I find that the folklore of the past will set one’s level of expectations to being achievable rather than too optimistic or too pessimistic. 
3. Let the Market tell you which road we are on.  Yes, I know you want to be contrarian and you don’t want to be sheep that follow the herd, but being contrarian when the herd is heading for the exits is a sure way to get trampled to death.  There is a balance between being the early bird and waiting too long before you act.  Be patient and prudent…but pounce.  Ready, aim, aim, aim and never firing just will not work, especially in this volatile market.    
4. Return to those stakes in the ground and take measurements.  Then of course make an assessment…Too high, too low, and not high enough, etc.  It is important to cut through the fog of all the items one can list for the Case for the Bulls and the Bears and to pick just one from all the chitter chatter that seems most prevalent at the time, as I showed you in my Tug of War note. That way you cut to the chase on what matters at that time instead of worrying about every bit of news or nuance.  At this stage of the game the run on the British Bank Northern Rock and the swift move by the Bank of England to shore them up put the immediate focus by the FED that at all cost they did not want to see a run on the banks in this country.  Therefore, despite the ever looming problem they face regarding the impending inflation had to take a back seat for the time being.  Whether they overdid it by the generous 50 basis point cut on both fronts remains to be seen, and we can certainly see that there are many who feel that way as both Gold and the Ten Year Note went up appreciably today.  So that is the change in the Tug of War at this time.   
5. Change Management is a part of Risk Management.  Having done the homework, assess if it is time to change the targets you previously set, WITHIN the framework of what was previously done.  If the Stakes in the Ground have served their purpose or are now meaningless chuck them out, but invariably I find that I can still keep the original targets but move on up or down to the next level from there.  I’m sure you saw that in my assessment yesterday of the progress that has been made in the Gunfight at the OK Corral.  The upshot was that the Bulls won the first round.  Now we move on from there.   
6. Finally, find a way to serve up the meal of all of this in a simple form, hopefully in a sentence or a paragraph or a chart or a diagram, and keep it by your side as your own Game Plan. I know; I know…you are saying “Ian, we know all that, but don’t leave us with platitudes.  Where’s the Beef?”   I say you will be making a big mistake if you just skim over what might seem like platitudes…it’s called discipline.  Study them and see how many of those items you follow in establishing your own discipline in addressing the market.  If you buzz around like a blue bottle fly, you are never going to make it…in my humble opinion.  So here’s the beef: 

Here is a one page plan that slices and dices the market six different ways, four of which are Technical, one Fundamental and one Folklore, all of which are self evident to the reader.  It is in essence a ready-reckoner that gives you insight to the different Road Scenarios, and shows where the recent Gun Fight between the Bulls and the Bears took place.  Your job is to know which side is winning and act accordingly.  Enjoy! 

Best Regards, Ian.

The Big Bad Wolf huffed and puffed twice and blew the house of straw and the house of sticks down, but try as he might, so far he has not been able to do any damage to the house of bricks.  After the initial drop to a precipitous low in mid-August the market has righted itself with a respectable Bounce Play, and is now waiting for its second wind to hopefully return to its old high.  We have one more big item of anticipated news next week when the FOMC meets on September 18.   Then either there will be gnashing of teeth or hoorahs depending on whether Ben Bernanke lowers the Fed Funds Rate or not and by how much….25 or 50 basis points?   

I hope all of you are enjoying my Blog, which is a challenge, but I hope it gives you a blow by blow assessment of the market in these tricky times.  I have some good news and some great news.  With the help of a member of our Saturday Monthly Meetings who is a whiz at spreadsheets, we have come up with insight on Tops using the Hindenburg Omen and Eureka, and also Bottoms using Wilder’s RSI and Eureka, all based on the NYSE.  This will be the focus of the new good stuff at the October Seminar.  Like any other indicators, there is no silver bullet, but the combination of the two makes it more convincing when they occur together or in sequence.  This month I will cover the Game Plan Filter used in the Blog which has been fairly successful in showing the leaders are still healthy. 

Ron has applied his attention to the Barron’s 400, a new stock Index of their 400 selections.  We felt you would like this in your bag of tricks.  Ron has done a great job in slicing and dicing the good Fundamental stocks from the bad in terms of their current Technical performance relating to price momentum.  

The next Seminar will be in Palos Verdes Estates (PVE) just 15 miles south of the Los Angeles Airport for 3 days from October 27 to 29, 2007, inclusive.  The price is $1100/person.

Best Regards, Ian