Ian Woodward's Investing Blog

This is a follow up to the long note I wrote over the weekend that laid out the Strategy, Process, and Targets for a Game Plan should the floodgates really open up to the downside.  The hour is late, so the following is self explanatory:

We have hit the dreaded 90’s on %B less than 0.5 for stocks in the S&P 1500.  The Bounce from here is Essential or else:

It’s no surprise that things are looking glum.  I added more to the next chart to cover the early days of Black Swan:

…And this is the only saving grace so far that PANIC has not set in with full force:

Good Luck.  Best Regards, Ian.

When we have a strong Phoenix Signal using the Arms Index parameters for unusual downward action with the -2.3% down move in the S&P 1500 and it is followed by another -1.0% down day two days later as we did yesterday, it is time to take stock of when the floodgates could open:

Let me make sure you understand there is by no means Panic yet, but it is best to have a plan while we still have a cushion that assures forewarned is forearmed.  Here are pieces I have put together to guide you with the What, the Why, the When, the How and the So What?

1.  The % down already from the high

2.  How much “cushion” we have to get down to nervousness of -8% down

3.  How deep the “oversold situation” is relative to past history as a guide for what more may be in store on the downside

4.  The status of the Accumulation/Distribution for the Industry Groups

5.  The most recent behavior of Leading Stocks with ERG >255 and >270 to see if they are holding up or dying

6.  The reasonable targets for support and resistance

7.  The Go to Index of the VIX with ATR and High Jump for the earliest warning sign of the floodgates opening

Most of the charts are ones that you are accustomed to so the charts will speak for themselves, and where there is something new I will explain what to look for and its value in the scheme of things.

So let’s start with the % down from the high and the extent of the cushion to get to -8% which would take us to 291 on the S&P 1500:

…And here is the update of the damage to the Market Indexes which I previously showed with a 6 Bucket drop (0.61) for the S&P 1500:

At times like these it is important to see the extent of the damage done by looking at the # of stocks in the S&P 1500 that are in Bucket <0.  We are up to 380 and as you can see from past history, anything higher in ensuing days can start a steady decline if prolonged downwards:

Now here is a reminder chart, especially for any new members, who are interested in following the value of “Bucketology” with %B:

Couple this with the need to never fall in love with a single scenario, but have at least understood three so that you can identify the tides of the market as it sloshes from Overbought (high) to Oversold (Low) and points in between (Stalemate between Bulls and Bears):

It goes without saying that we are currently sloshed to Oversold, but let’s try to understand the depth of the correction at this stage compared to recent past history of significant points in time we can immediately relate to.  The next two slides do that:

Last week I warned you to watch out for the Jobs Report, and it certainly caused a buzz to round off the week on that state of affairs:

It is never enough to just focus on the bad news.  It has a habit of feeding on itself.  The next two charts give some “hope” that all is not yet Gloom and Doom relating to what has transpired in the last two days.  Always turn your attention to how the Leadership is behaving:

The above relates to the Industry Groups in terms of Accumulation/Distribution and below we have a flavor for Leading Strong Stocks:

So let’s take two steps backward to come forward.  It is now all of three months ago since I suggested that the Gunfight at the OK Corral between the Bulls and Bears was being played between 2600 and 2900, with the 50-yard line at 2700.  That has held true so far but unfortunately we are now losing the cushion we had in the 2800’s on the Nasdaq and we are ominously back to retesting 2700:

…And here is the S&P 500 for good measure.  What we immediately see is that Fibonacci Lines come into play as well:

So given all of that, what one item will give us the earliest clue short of an obvious run for the floodgates of an early warning?  The VIX:

Good luck.  Best Regards, Ian.

Now that QE-2 is virtually over, the summer doldrums are upon us, and complacency still abounds, it won’t be long before we see a real knee jerk to the down side to wake us up.  Time is running out for Uncle Ben and one wonders what rabbit he has for the next phase of the Market cycle.  The Gloom and Doom Camp say that we are but ten years into the 17 year “locust” cycle, so expect another big leg down before we have a flourishing Market again.  With the Debt the biggest cause for concern, we wonder what Uncle Ben has up his sleeve to avoid the disaster of a double dip recession?

Let me first address the “go to weapon” for measuring Panic…it is our old friend the VIX.  I gave you this chart a few blogs ago or maybe it was in the newsletter, so let’s look at it now.  We couldn’t be at a better point in time.

The VIX is around 18, but shot up to above its 200-dma at ~20 intra-day yesterday with that big down day.  However, my good friend Maynard has chided me that I have kept this secret weapon to myself when I introduced you to the High Jump in conjunction with ATR (Average True Range).  My life and your life should revolve around “threes”, red, yellow, green; High, Low and Middle road, etc.  So the other day I dusted off the VIX in conjunction with the High Jump and the ATR…why these two items?  Because they magnify the measurement of “Panic” when it happens and enhances the chances of us spotting it earlier!  The early bird catches the worm:

I couldn’t resist that leg pull with my dear friend Maynard…they don’t come any better.   So, that makes up for all my tardiness on this gem!  It will save our skins.

Now let’s turn our attention to a follow up to yesterday’s blog, and show you the results and findings to give further clues as to oversold and Bounce Plays:

As you would expect, major damage was done yesterday to the internals of the market as shown above, but we are still not at exhaustion to the downside.  Please realize that Memorial Day is this coming weekend and things tend to get quiet around such three day weekends as this is when the big wigs trot off to the Hamptons.  I gave you the chart in yesterday’s blog note, and added the percentage of 40% for the bottom four slices to give you a quick comparison with the damage done yesterday which is shown on the following two charts:

…And here is yesterday’s results.  Lots of damage done, but always the hope that we now are leaning to an oversold market and can then expect a Bounce:

…And here for your convenience are the two pies together, showing the actual numbers for the bottom four buckets of the S&P 1500:

So what you might ask?  Well, here is a recent comparison of a Low Day back on 8/24/2010, where you will recall we had already had a ~17% correction and were retesting the lows prior to the start of the Fresh Market Rally on September 1, 2010:

We could have a ways to go if Gloom and Doom sets in.  I produced this particular chart using EdgeRater, with a tip of my hat to my good friend Chris White.  Last but by no means least, here is an extended view of the “Purple” chart, which gives us a good feel for where we are and where we could go to bottom.  Good Stuff:

So there you have it.  I hope you folks feel you get something out of all of this stuff…I am not looking for atta boys, but it would be rewarding to get some feedback or have a comment to make from others than the usual faithfuls who always show their appreciation.  As you can imagine it takes a good deal of Ron and my time with all the fodder we provide for you to keep you on the right side of the market.  Have a Happy!  Ian.

As I explained on the HGSI Yahoo bb, I was unable to upload this Blog Note yesterday due to Technical difficulties, but hope the message will still be useful as it seems my fears came to pass this morning as I write this note.  I trust the many users of the HGSI software appreciate the support you continue to get from the HGSI Team.  Many thanks to George and Matt for fixing the problem late into the night.

Last week I gave you a hint that the tide was turning, and the clue would be the extent of the Bounce Play from an oversold market.  So my message this week to the Bulls is “The Wing is Broken, Start Praying”:

Let me hasten to add that nobody can tell you how much of a correction we will have, but Friday’s action was enough to suggest that the early bias has started the turn to the downside.  Let me also say that the Market is NOT Broken at this stage, and that we have a cushion regarding Lines in the Sand for the downside targets at this point in time.  I also believe at times like these, forewarned is forearmed.

In the following charts I will give you the fruits of several months of work to identify Overbought and Oversold Markets at Critical TURNING Points with many of the charts that you are totally familiar with, so there should be no surprises.  I will start by picking up where I left off on my last blog in particular, then review a few other charts of AAPL and ABCDE Pie Charts which I stress from time to time, and finally leave you with just one chart you can use with the HGSI Software that will give you the day to day pulse of the Market relative to the Targets which I will unfold for you to watch.

To maintain continuity with last week’s blog, I start with three further slides to the one above to update the picture since then and to explain the so-called “Purple” Chart.  I start with the now very familiar chart of the 10 Market Indexes with the % 1-Day Change in %B for each and their average on the left hand side; also, the actual day by day %B Bollinger Band reading for the same Market Indexes with the Average, and then Days Since that Average attained a recent high at the extreme right hand side of the chart.

Although the numbers are there to see, the colors are focused on to show when the Market Indexes either Peak or Trough.  Notice in the following chart that the Indexes peaked with the Averages shown in Dark Green over two days of 1.05 and 1.02.  The significance of this Overbought status is that such results have occurred on approximately 40 occasions over the course of the past 12 years, so about three times a year.  As one would expect some form of correction ensues, sometimes minor of less than -8% down, sometimes Intermediate of between -8% and -12%, and occasionally drop to a Major and/or a Bear Market of over -20% down.  The biggest drop we have had these past two years is the -17% in the so-called Flash Crash of May 2010, which lasted through August of that year.  Since then the new bull rally started on September 1, 2010 and has eked out ups and downs over the past 38 weeks since then with the last three months being very jittery, as shown in two charts down from here:

You will recall that I stressed last week that with the Market Indexes correcting as expected from the high of 4/27/2011 (I might remind you virtually one year to the date it peaked last year), we should expect a dip to a low in the Indexes to follow.  This occurred on 5/17/2011 at an average low reading of just 0.16, when it was expected we should expect a bounce play.  The clue to the strength, or lack of, that bounce came within two days and the Market Indexes then swooned on this Friday, as shown.  Note that it was Options Expiration day, and the only comforts that the Bulls can take are the lack of volume and the complacency still existent by the low VIX readings under 18!

The next chart shows how jittery the market has been these past 13 weeks.  However there is a natural cushion down to 302 for the S&P 1500, while the -8% Line in the Sand is at 291, so those two yardsticks should be kept in mind as the weeks progress:

I left you with a conundrum last week with the so-called “Purple Chart”, which I assured you takes out the mystery of the relationship between the Bollinger Band %B of the Indexes and the % of stocks over 0.5%B, which is the key to the “Bucketing Process”.  Here is the original chart with a few annotations added such as “Major Tug-o-War” and “1” and “2” on top of the Arrows as shown:

You will note that if recent history was to repeat itself, we should expect a Bounce at either “1” or “2”.  Since the S&P 1500 %B reading was at 0.20, I indicated that we should see a Bounce Play at Point 1 the following day, or we would fair far worse and could get badly oversold to Point 2.  The Market chose to Bounce at “1”, which then gave us the perfect opportunity to watch the QUALITY of the ensuing Bounce Play.  Needless-to-say, it fizzled as shown on the next chart, where I also uncover the way to interpret the “Purple”, which is the difference between Bollinger Band %B in Green, and % of Stocks >0.5 %B in Red!  Note that I have drawn in the difference between the two green and red lines on the upper portion of the chart in Purple:

After months of wrestling with the two differences between %B and % of Stocks above 0.5%B, I feel this is a breakthrough in interpretation, and leads to a very simple way for you to follow the pulse of the market regarding the possible behavior of Large (institutions) and Small (herd) Players!  That will come later in this Blog when I give you just one pie chart to follow to understand the pulse of the market.

For posterity sake, let me expand on what is on the chart with regard to the essence of my findings:

1.  When %B of the Index is ABOVE that of the % of Stocks >0.5 %B, play to your heart’s content.  The Large Players are Bullish and driving the market up with heavy accumulation of Leading Sectors, Industry Groups, Stocks and ETFs.  The emphasis is on “Leading”.  The broader market of all 1500 S&P stocks is lagging, as depicted by the Difference between the two “green” and “red” line readings, i.e., the purple portions of the chart which I have designated as “Play”.  We know from past experience that when either or both readings are above 0.70 (70%), the market is in the Safe Zone and one plays with impunity.

2.  Let me now take the reverse situation…when %B of the Index (green line) is BELOW that of the % of Stocks >0.5%B (red line), Large Players are fleeing the market, while the herd is still lethargic and/or complacent, i.e., watch out for pullbacks, corrections, bifurcation, rotation…you name it.  This is best illustrated by the Negative Purple area from 3/1/2011 to 3/16/2011, where all Market Indexes were severely trashed.  This phenomenon has also shown up this past six days from 5/13/2011 to now.

3.  In between these two general boundaries of Overbought and Oversold is a “Place your bets and take your chances” zone depending on the strength of the Bounce Plays, where a typical area is coming out of a correction to a potential new rally.  This is best described by the 3/17/2011 to 4/06/2011 timeframe, where both the green and red lines are moving essentially in unison.  The start of such a move is seldom before %B has come up through the Bandwidth and usually from around 0.20.  Likewise, potential Bounce Plays occur at 0.20 upwards.  I need hardly mention that at the start of a Fresh Market Rally, ala 9/1/2010, the odds of success are far greater than they are now 38 weeks later.

If this market deteriorates further next week, then the likelihood is that we will at best Bounce at 302 on the S&P 1500, or if that is broken then at 291 which would be the last line of support at -8% down as mentioned above, before the floodgates open.

Let’s turn to the Canary in the Coalmine…i.e., AAPL.  You will recall this chart I showed a few blogs back:

…And here is where we are today:

If AAPL breaks 331 to the downside, watch out below as the market should then be in serious jeopardy.  It goes without saying that this market will cut you to ribbons when you see the see-saw of the Groups:

Now let me give you the tools to watch the market at Overbought and Oversold stages so that you can just rely on one chart for you to use in the HGSI Software Spectrum Analyzer which will give you the pulse of the market in five minutes flat on a daily basis:

Here are the Keys to the Kingdom for Oversold and then Overbought for the past three years.  We start with the number of stocks recorded for the S&P 1500 with %B <0, i.e., below the Lower Bollinger Band:

…And here is that same picture for stocks >1.0, i.e, above the Upper Bollinger Band:

The Meeting at the Palos Verdes Library on Saturday got the people all excited that this is their Oyster.  Our special thanks to Ron Brown for giving us his Weekly Report, which was much appreciated.  The reading of 58 in the Bucket <0 is shown, and I give you the Targets to watch for in order to gauge the extent of any correction lower from this point.  Use the Warehouse with Market Index Components, and then select the S&P 1500.  Then turn on the Spectrum Analysis Tool and load Bollinger %B as shown:

Be careful until the dust settles.  If the market recovers from here, keep this in mind for the next time.

Best Regards, Ian.

I can tell you folks have missed me a little, but we had a Humongous Power Cut that kept me out of seeing the market behavior these last couple of days, since I finished the newsletter.  My sentiments are reflected below:

However, after being hammered these last few weeks, there is always a bounce play to follow.  It is the extent of that bounce that gives you the clue as to whether the Party is Over, or that there is one more push to new highs:

All is by no means lost as yet, as there is still a decent “Cushion”, but the rally is very long in the tooth and is showing how jittery it has been these past few weeks…even for day traders, who can see their gains fizzle by the end of the day, regardless of which way they are playing it.

Here is another cut at showing the market…it suggests the same opinion that we are at the hairy edge right now:

…And if that is not enough, here is a new view which I will leave you to fathom out, but should be straightforward if you buy all this good stuff!  I am pushed for time, so maybe another day I will go through the breakthrough I have made between the relationship of %B and % of Stocks >0.5 %B…the answer is in the “Purple”:

So the answer is “Watch the strength of the Bounce Play” from here, if and when it comes.  The Targets are all on the Chart.

Best Regards, Ian.