Ian Woodward's Investing Blog

This is my St. Patrick’s Day Gift to you and my Wife!   Two weeks ago we felt that the crisis in the Middle East, especially in Libya, and the resulting blip in oil would be the test for QE-2 to keep this stock market buoyant.  Now we have the terrible disaster of an Earthquake, a Tsunami and the Nuclear Explosions in Japan to test it further.  Of course, our hearts go out to the Nation and our friends at Fuji-Xerox.  At least for today and the next few days the Party is Over, but who knows what next week brings:

It is now ten days since my last Blog when I gave you the Game Plan using the High Jump with ATR and the VIX, so forewarned is forearmed.  The line in the sand on the VIX was very CONVENIENT, as both the 200-dma which was flat, and the fact that the VIX at 23 was turned back several times in the past, gave the right conditions for Custer’s Last Stand between the Bulls and Bears.  It was the ideal place for the VIX to be turned back if QE-2 was to dominate over such disasters to cause only temporary blips on the market’s road upwards.  However this was based on what I showed you in the picture below using the Flash Crash as a pseudo example for a knee jerk if the Bears were to prevail…hence the  Game Plan I gave you:

I am writing this while the market still has an hour and a half to go and the picture looks bleak with the VIX into new high territory at a whopping 30.43, so the floodgates have opened.  Last night when I looked at the results, it was fairly obvious to me that we were already in trouble with the High Jump at 87, getting mighty close to the target of 95, and the VIX had already broken through to 24, close enough for government work.  It is now down to 28ish as I post this blog note with 20 minutes to go in the market:

You have only to look this up at the end of the day to see if the Game Plan came true, in which case chalk one up for this combination the next time we have a Major knee jerk in the offing and set your targets accordingly.  I have found a valuable NEW use for the High Jump, which has never let me down in the twenty years I have used it.  We will teach you all of this at the seminar in ten days time.

Thanks to Robert Minkowsky who first kept a real beady eye on the behavior of the Leaders through watching ERG 270 and ERG 255, and to my other good friend Stephen Cole for keeping this up to date, here is another Lead Bullet to stiffen your backbones.  The beauty of this is to not be too cocksure that one indicator will do the trick and here we find that things are iffy until we see the results tonight.   With all the discussion on the bb’s of Pocket Pivots and set ups of leaders still holding the fort, it pays to watch this one as well in the HGSI software tonight to see if these numbers have held up or really given way.   Jerry Samet has shown that there is a marked deterioration in his leaders group which he has faithfully produced for months, and Ron Brown shows us the deterioration on %Gain on a daily basis in his One Notes which are gems.  Net-net, it takes Teamwork to filter through the Noise and give you time-tested pictures of which way the wind is blowing.  Remember you have to be your own Guru, since no two stomach’s are the same and it is your money not the guru’s.  But at least you have had ample warning:

Please note the last sentence under this chart…if this is the worst that happens AFTER the Japanese Calamity is behind us, then in all likelihood the market will rebound from a vastly oversold situation.  The quality of that Bounce Play will tell us whether once again the QE-2 is propping this market up or that despite the Fed’s Reports and actions, reality of the future is beginning to set in when all of this pumping stops.   After all there is money to be made by buying a market of stocks even if the Stock Market is deteriorating, and one can become adept at playing both sides.  Good Day Traders love volatility, but eventually those who are trying to preserve a Nest Egg in their 401-K’s do not want to see it dwindle to a 401-Keg.  For those who do not know that inside joke, try 401-Keg in the Search Window of this blog and you will see that I enjoyed over 5350 hits in one day when I first published that blog with tongue in cheek on October 8, 2008. 

Last, but not least, it always pays to watch the Canary in the Coal Mine, and here is the picture of Apple’s performance these last several days, and especially today:

So I leave you with a picture which sums up the situation and we shall see what unfolds between now and the seminar in ten days time.  I have taken time out of my busy schedule to share this with you so that you have a good understanding of the pulse of the market before we see you:

Best Regards, Ian.

Whether you are a Bull or a Bear, it’s a difficult Stock Market to wallow in to say the least.  On March 3, 2011 we had a Black Fawn Event (thanks to my good friend Stephen) that came from out of the blue…the Reverse of a Black Swan:

…And the very Next Day we were back to playing Snakes and Ladders, so the Topping Action continues:

Note that the Twelve Drummers Drumming did their thing on days 9 and again 14, so at least you were forewarned:

Note that the %B of the Indexes and the %B above 0.5 are in the low 50’s implying stalemate as equilibrium is at 55:45:

…and to give you a longer view of Stalemate, here are the snapshots for the NDX, OEX and S&P 1500:

However, there is one slight ray of sunshine…if you are an Optimist, and that is the picture of the Leaders:

But then again, the McLellan Summation Index is stuck in the mud, thanks to my good friend Mike Scott:

If you lean towards bullish, then the High Jump is easy…the Nasdaq must first get past 2841 and then reach for 2862:

But we must be ready for a knee jerk, in which case I have conjured up one for us with the VIX, ATR and High Jump:

Now you have a Game Plan for Next Week.  See you in three weeks at the HGS Investor Seminar from March 26-28.

Best Regards, Ian

The tide has turned for the worse in the last three days and our friendly Financial Newspaper says “Market Under Pressure”…but the question is “How Much?”  Hopefully this blog note will give you a perspective on the answer to that question:

So let’s start with “From Whence we Came” going back to the Eureka Signal on 12/01/2010 when we had an Eureka and several Big Kahunas to the upside which started the Santa Claus Rally.  By the 18th of January all the Market Indexes were overbought as shown at the bottom right hand side of the next chart.  The very next day we had a Phoenix with some big Kahunas to the downside and that is the first shot across the bow: 

Usually WITHIN twelve days from this Overbought date, we should be into a Correction, and we will see if that golden rule still holds true…we don’t have long to wait.

There are two items that can delay the inevitable tumble for some form of a Correction, since I will show you that we have already achieved “Bifurcation” and the Rotation is already here…but more on that later.  The two Items are:

1.  The State of the Union Address is on Tuesday as my good friend Sherman reminded me at our Saturday User Group Meet Up, and it is most unlikely that the Big Boys will want to drive the market down unless there is some earth shattering news that triggers a big correction.

2.  These are different times we are in; similar but different in that we have seen long rallies but different in that this market is being propped up by our good friend Helicopter Ben who is dropping big leaflets by way of the FED’s POMO otherwise why would we have not one, but two long rallies of the S&P 500 above the 10-dma as shown below:

The next two charts are familiar to regular readers so they need no explanation, but will give you the latest picture of the Divergence that continues between the Internals of the Market and the Index Price:

So let’s turn our attention to the stages of deterioration from a Market Top to see how near we are to a Correction.  Based on the recent results I have kept you appraised of we should go from Disparity to Bifurcation to Rotation and ultimately to Correction or a Major Snapback from a Pull Back.

Disparity is a new term and I suggest it is the first clue that things are going heywire when one sees that the %B of the Index is still hanging tough and staying up, while the S&P 1500 Stocks above 0.5 begin to drop off as I showed in the last chart I posted in the previous blog, and repeat it here:

Let’s first look at the Disparity Factor for the past two years.  I consider any difference of >0.20 is a signal.  We can immediately see that this factor was about 0.24 and signaled just before the Flash Crash which then resulted in a 17% correction:

So let’s zoom in on Recent Disparity in the last three months where we see the difference, or Disparity as I call it, between %B and the % of stocks above 0.5 was as huge as 0.48 and we had a mild correction of 4%.  This time it reached a peak of 0.37 and the correction has just started:

So having spied Disparity, another clue in our arsenal is “Bifurcation” which my good friend Mike Scott dubbed and I have also featured this in earlier blog notes.  Narturally, as we get good at this stuff, the more significant buckets to watch are at the two extremes, <0 and >1, and here we see a whole bunch of stocks being trashed back on January 7th.  In fact the % of stocks in this bucket is the tallest at 12%:

As it turned out Bifurcation first occurred on Janaury 7th.  Note that when compared to what occurred on April 30th a week before the Flash Crash, not only did we have Bifurcation but also the % of stocks in the top bucket >1.0 was also at a low of a mere 4.1% which suggested that the Correction was already underway, whereas now we still had a healthy 9.2%:

Now let’s look at the picture as of Friday, January 31, we certainly have Rotation underway as the percentage in Bucket >1.0 has faded to 3.2%, but we have to wait to see if it is a full blooded Correction:

The next question is when do we know we have a full-blooded Correction?  When the Pie Chart changes to 30:70:

Don’t hold your breath as this next chart shows you the Bifurcation which has occurred in the the Ten Market Indexes I track.  It is no news to you that the likes of the Nasdaq, the NDX, the Mid Caps and especially the Small Caps have all been taken to the woodshed and trashed.  However, surpringly the DOW is the strongest Index with the S&P 500, OEX, and NYSE still holding up.  Just look at the “Rose shading” on the left hand side of the bottom chart…Distribution is heavy:

In Summary:  I would have said that next week is critical, but with the State of the Union Address on Tuesday, do you really think they will dump the Market unless something major upsets the Applecart?

This coming Thursday, Ron and I are holding an on-line Webinar on three Impulse Indicators – the Eureka, the Phoenix and the Kahuna.  We are already full and I urge those who are attending to digest this and previous blog notes as they substantially augment what we will cover in an hour and a quarter. 

Best Regards, Ian.

My good friend David Galardi prompted me with a theme for this weekend when the market is teetering on fumes, and there are cross-currents appearing that suggest the Large Players may be leading us “Down the Primrose path to Fugacious Blossoms!”  I had to look up the meaning of “fugacious” which turns out to be fleeting, so I offer you this reminder:

So David is right as after a strong recovery on the first trading day of the New Year, similar to last year I might remind you, we are now on the brink of once again sitting at the hairy edge of Stalemate where we wait and see if we bounce out of this hole or give up the ghost and head down for a correction.  Next week should settle the fight between Bulls and Bears:

The question you might ask is “What new evidence do we have that things are looking a trifle bleak?”  Another good friend of mine, Mike Scott, recently talked to spying “Bifurcation” where on the one hand %B for the S&P 1500 is still a healthy 0.80, while the internals of the stocks themselves within the S&P 1500 are essentially at 50:50.  More importantly, the bifurcation shows that although the upper end of those stocks above %B >1.0 is still holding up reasonably well with 9% in that bucket, we now see that the highest % in any bucket is in the one <0 with nearly 12%…i.e., being well and truly trashed:

I am sure you have forgotten that one of the Golden Rules I established moons ago is that any %B <0 reading of >180 stocks is an early warning sign of an impending correction.  We had 174 stocks on Friday, January 7, 2011, so we are knocking on the door, and that is close enough for me to give you that picture to prove my point.  It does not mean “die”, but it invariably means correct.

But now I offer two further charts as evidence that Bifurcation is well on its way, and that is invariably the first stage of two to bifurcation and a correction.  I trotted back in time to when the Market Top occured back in April 2010, and here is a comparison of Bifurcation underway on Thursday January 7th, but yet not quite ripe enough  as compared to both Bifurcation and Correction on April 30th.  Note how Bucket >1 is still holding up, while on April 30th, 2010 the last two buckets are very weak as shown in the chart below:

The above was the picture on Thursday, January 7th…now look at how the picture changed for the worse on the very next day, Friday, January 8th.  With the bucket <0 showing the highest percentage of 11.6%, it mimics what we saw on April 30, 2010, so bifurcation is “complete”.  Now we wait to see if the last hold out for the bulls of 9.2% in Bucket >1 gives way to weakening down to below 5%.  I suggest that will be the final blow.  At least we now know what to look for in the critical aspect of the tide turning from Overbought through Stalemate to Oversold.   

There are always surprises in the Stock Market, so don’t count your chickens before they are hatched, but for sure things are ripening towards a correction as early as next week.  We do not have long to wait.  We are now in our 20th week of this Rally.

At the top of this note I warned of several cross-currents, and one way to confirm this view is how rapidly the shift in the market occurs when the leaders in the NDX (Nasdaq 100) were being trashed behind the woodshed two weeks ago to come roaring back these past five days as shown below.  Likewise the Small Caps Index of the Russell 2000 (!RUT) is currently the weakest with a %B of 0.58 along with the Mid-cap at 0.61. 

This may well be due to the natural changes Portfolio Managers make at the end of the old year and the start of the new, but then the January Effect hardly lasts more than a couple of weeks, so we might have a surprise reprieve though not for long, especially if the Bucketology continues to show sloshing to the left! 

Best Regards, Ian.

This week could be critical to establish if the recent rally holds up or peters out.

Last week I gave you plenty of fodder to watch so this week I will give you a review of where we stand and what must be achieved going ahead.  First, let’s look at the Golden Cross and High Jump Picture:

Now let’s take a closer look at the Nasdaq and 50-dma High Jump.  We can see that we are at a critical juncture.  The upside is that we could go 10% higher for the Nasdaq, which would put us at around 2480, but we are already showing signs of turning down and need a boost next week to send us higher:

Thanks to my good friend Mike Scott, these next three slides come from his work.  The McClellan Summation Index is showing signs of fatigue and also needs a fresh push in the Mc Clellan Oscillator which is at the 68 mark, and must drive up to over 180 for comfort. 

As I showed last week, this market has plenty of Leadership with High ERG Stocks leading the way.  However, I am sure you have noticed that the Nasdaq 100 (NDX) got hit this past week…I am not surprised as it has led all the Indexes since the July 1st Base Low.  None-the-less we show that the A Accumulation is now at a healthy 13% and A+B is very strong at around 62%:

Last week I gave you two Cases to watch in the Middle Road Scenario for Harnessing the Hindenburg Omen where I am sure the Naysayers are itching to come out of their woodwork and crow “cock-a-doodle-do”.  Here is the slide to refresh your memory:

…And here is where we stand today on Case #1.  We have had a healthy week with the %B sitting up at 82% (0.82), but it has descended from its perch the previous week which reached into the low 90’s.  You will recall that we are on a Calendar Day track and this will be the critical week for Case #1 to either happen or be behind us and finished:

It doesn’t have to be at the start of the week as I have depicted, but the important point is to watch out for at least a 20 point drop in a couple of days in %B to around 0.6.  At least WE WILL HAVE AN EARLY WARNING.  If it skips buckets in doing so, watch out below as I have taught you.  In all probability it will mean the finish of the rally for now.  On the other hand if %B can stay up above at least 0.7 then we have a fighting chance that the Rally can hold for another couple of weeks.  Case #2 lies in waiting should such an event occcur:

The bottom line Message is that as long as %B of the S&P 1500 stays above 70% (0.7) and shows strength with well over 500 Stocks (33%) in the top four buckets above 0.7, the market will remain strong.   Otherwise watch out below, especially if we see skipped buckets to the downside and 500 stocks in the bottom four buckets below 0.3 for %B.  This rally will then be kapput!

Oh, by the way, Helicopter Ben is still pumping away with his Quantatative Easing (QE) or POMO as they call it, so that helps to keep the wolves at bay.  Unfortunately, it is a two edged sword and I suspect that one day we will see the dark side of all of this pumping action.

We have only three weeks to go to the seminar, so if you intend to come, hurry, hurry, hurry, but we do have seats available at this late stage.

Best Regards, Ian.