Ian Woodward's Investing Blog

 

At times like these one needs magnifying glasses to see the footprints in the sand to know what may lie ahead.  I rely on past yardsticks to identify what hurdles we must cross both up or down to know whether we are now on the Low Road going higher or lower. So far the bounce is weak: 

The Benchmarks Going Upwards for a Reasonable Bounce: 

1. The S&P 500 must at least get back to the 50-dma which is at 1485 for starters, i.e., three strong up days, to put the odds strongly in our favor that the Base Low when re-tested will hold.  
2. The NYSE for good measure must get back to 9750, but expect resistance at 9500. The NYSE New Highs must get above 125 and new lows down below 50 on that same day, for the very first sign of a recovery.  I didn’t say recovery, I said very first sign.  It must build from a >2:1 ratio to 4:1 and then 8:1.  These are not easy targets, but understand much damage has been done. 
3. The NASDAQ must get back above 2575, i.e. two strong up days to start to repair the damage.  
4. The DOW needs to get above 13,400 for the same reason; three strong up days – a tall order. 
5. Understand that the Market is already baking in the expectation of a Fed Fund’s rate cut and so the naysayer’s I mentioned the other day are just waiting to see if the FED will act further. The cloth the Fed has is until their next FOMC meeting in September.  Bake this in to the equation, as any shilly-shallying on their part on surprises will be a sign of weakness and one up for the Bears.  
6. The Critical Lines in the Sand are 1371 on the S&P 500 and 2387 for the NASDAQ, which are tapped in lightly for now.  These are the Big Bad Wolf lines, and everything hinges around them.  If these are broken to the downside the Market is in a lot more trouble.   

A. If the above criteria are met, then there is a reasonable chance that the following retest will hold at the previous low or higher, i.e., the third huff and puff won’t blow the Brick House down.  However, as I said Rome was not built in a day, and this will be a drawn out recovery at best, one that could last well into Labor Day and even up to the fresh earnings reports in mid October.    The FED is now on notice and let’s face it they have acted promptly so far.  The Grand Old Duke of York…a.k.a. Bernanke baby knows that this test is his legacy.  He is no fool.  So, if you are on the short side of the Market, make sure to include “expect the unexpected” in your deliberations.  

B. If these criteria are not met, then it will be a tepid bounce, so expect the retrace to test the low and the odds are the Indexes will break down further.  Just refer to the roadmap in the Newsletter and you will know the journey ahead.  But remember, there is no point in having a road map, if you as the driver do not have your hands on the steering wheel, are in control and prepared to act.  So that those who are short the market can also take comfort, I have given you enough fodder to establish the downside Strategy and Plan.  Best Regards, Ian.

This entry was posted on Tuesday, August 21st, 2007 at 4:15 pm and is filed under Market Analysis. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.