Ian Woodward's Investing Blog

Mailbag:  My friend David Elliott wrote:

Ian:  Many moons ago you wrote “Where is the Beef”.  As I remember it was a market that climbed higher on low volume, but eventually failed.  Is our current market similar?

Hope you have a good day.  Why not play golf; the market seems to like it when you do.  David

Well David, you have a good memory and your wish is my command as I watch the U.S. Open at Pebble Beach, along with the Soccer and of course the Lakers, yesterday.  If the Market can do as well after a hard fought series we should gradually see this Market rise out of the ashes.  But you are right…the Volume has been a trifle putrid, but we must have patience as we have only achieved Step 1 of the Recovery.

I hear Hsin saying:  “All Ian’s bullish signals have been fulfilled, so should we be bullish now?”  Short term traders have long since closed out their shorts by and large after that rotten FTD call by our friendly newspaper.  We waited patiently for the two Eurekas and simultaneous Kahunas and the Composite %B >0.50, so yes the requirements for a Rally were met.  However, that does not guarantee a successful Rally, just a start to getting off the bottom.  So Day Traders turned to the long side once they got the second FTD, the earlier the better since the Early Bird catches the worm.

Rome was not built in a Day, and after an Intermediate Correction which has been this deep, i.e., 14.4% from High to Low on the S&P 500, and in this case, we need three steps in all to get out of the woods to a fresh solid rally.  Here is the picture of what was achieved this week:

That’s not bad for a week’s work, but now comes the next step which is harder.   My good friend Dave Baratto reminded me at the March Seminar…”Ian, with all the new good stuff, we are inclined to forget the golden rules of yester-year you have taught us regarding Classic Recoveries”. 

I gave you that Winky-winky in my May 30th Blog, so please go back and see the Chart Pattern.  However, here it is for your convenience, and I have stuck the need on the Right Hand Side of the chart, so that the challenge is perfectly clear:

1.  We must rise at least half-way up the right side of the cup
2.  We must form a handle…Cups without handles will burn you
3.  The 50-day Moving Average must be flat to slightly pointing up
4.  A breakout above the Declining Tops Line (DTL) from the high to the top of the handle, aka…the 405 Freeway.
5.  The 9-dma >17-dma >50-dma with the moving average crossovers

So here is Step #2:

Obviously the longer you wait, the higher the Indexes rise and sooner or later there will be a correction.  So far the Bulls have dodged a bullet as the market has risen at least five days in a row.  One might have expected a correction today being Options Expiration Day, which is certainly a surprise, though nothing should surprise us these days.  The correction can come in two forms, a minor tight move sideways to form the most important requirement in Step #2 which is a “Handle” or the rally fizzles and goes down as a bust.  Don’t forget this:  Handles must of necessity have light volume as a signal that bulls and bears are in agreement on the value of the Index or stock.  Then the breakout must have high volume…mark my words, or it fizzles.

And now we come to Step #3.  This comes with always understanding three Scenarios and recognizing what your Competition is thinking and is up to.  I did it all my career…”Know thy Competition”.  If you are Bullish then at least understand the Bearish Scenario and vice versa.  If the Market has just come out of an Intermediate Correction or worse, you must recognize that the Bears are just waiting to trounce the Bulls, especially if they were trapped themselves on the wrong side of the market.  It goes without saying, but I will say it, that is how the favorite patterns of Double Tops and Head and Shoulders Tops come about especially when they coincide with the 50-dma in the case of the right shoulder!  The higher the Indexes rise towards the 50-dma or 200-dma (whichever applies in this case), the more the skeptics of the move rub their hands, and those who are feint of heart never get in until it is too late.  It’s all a case of Approach, Style and Stomach which is different for each one of us…so here is Step #3:

I didn’t say it was easy, but at least you know what to look for.  Remember this, there is absolutely no harm in establishing Targets which come from the discipline and experience of Stakes in the Ground, Measuring Rods and Rules of Thumb.  That suggests you have done your homework.  Never fall in love with a Scenario, but you will immediately recognize which one the Market is telling you it is on.  The Major Challenges I set have been met, but then that sets the stage for a worthwhile rally, especially as the canary, aka AAPL has more than a dose of oxygen and looks a trifle “Perky” since it is now at a new all-time high.  Don’t stop there…when you see the likes of SNDK and OVTI also trotting off into the sunset, you realize that the food chain is also benefitting. 

We started this with “Where’s the Beef?”…and it remains that way as the conundrum for now;  the higher the market goes without volume the more vulnerable, but it’s the second mouse that gets the cheese in the trap!  Whether that is the Bulls or the Bears remains to be seen.  So far, the Bulls are thankful for small mercies, and the early birds are enjoying the worms.  

 Best Regards, Ian.

In reviewing the Blog Note I wrote yesterday, I realized that the Multi-Taskers might like to see the KISS Approach, so here it is in one slide with the key Messages at the bottom of the picture. 

Others who want to learn how to get to the bottom line or as I call it “So What?”, will always ask “Why?”  So for those who want to dig further to see the rationale the next two slides should do the trick:

…And then there are those who prefer the words instead of the music and look for the “What, the “When” and the “How?”  That is what I gave you yesterday, but to keep it simple for you because “I don’t have time, Ian” here it is in the next two slides:

But before we get too excited about all of the above, I warned you last week that the Volume was pitiful, especially with the likes of the Nasdaq and Russell 2000.  My good friend and partner, Ron Brown, summarized his Weekly Report as follows “The most striking thing about the market rallies on Thursday and Friday was the lack of volume.”  Make a point of catching his valuable weekend movies at:

www.highgrowthstock.com/WeeklyReports

So there you have it just as you get it on all my blog notes, the Newsletters and the Seminars…”The What, the Why, the When, the How and the So What”.  There is no substitute for seeing how your stock portfolio is doing, and then having the appropriate key candidate lists for both the long and the short side.  In the most recent work we have done that is exemplified by the JIRM list, which needs to at least be outperforming the Market Indexes (which it is), and then the fresh list of new candidates which should be providing respectable bases and attractive set-ups.

Please understand that I primarily focus on the Market and Tops Down analysis on this blog, but you ALSO KNOW that I do my homework with what others would call a Bottoms Up approach.  Call it what you wish, the HGSI Software provides the flexibility to fit your Approach, Style, and Stomach…I’ll spare you the acronym!

Lastly, don’t suffer from Analysis Paralysis…get to the “So What” Synthesis quickly.

Best Regards, Ian.

My Mailbag had two notes in response to my last blog on AAPL being the Canary in the Coal Mine and thanks to them for their positive feedback:

Hi Ian !
I am sooo glad that I listened to you –and am grateful for the “wc” Chart. I bailed  on AAPL while I still had a decent return—and am more thankful you still want to help us home-gamers even more!  Becky

In a message dated 06/09/10 10:26:31 Pacific Daylight Time, Michael Kahn writes:
my .02 – Ian nailed this in his blog.  ian wrote: 

“However, I say don’t switch horses in mid-stream.  If this market is to go “DEAD”, AAPL will keel over long before NFLX.   Enjoy!  Ian”

Their comments were four days ago, before the Big Up Day on Thursday where we got the first leg of what we were looking for…an Eureka and a Kahuna Up!  We need a follow through of the same ilk, but for now  “Half a Loaf is Better than no Bread”. 

Things are in the balance as we have already had an Intermediate Correction of 14%, and need to see another boost before we see any signs of recovery.  The shenanigans of early May with the 1000 point drop in a matter of minutes followed by a 400 point recovery caused a major change in the psychology of the market from Optimism to Panic in the ensuing weeks with all that I have previously discussed.  Now the Bears are still in control with the Bulls grasping for Hope.

 Friday’s results finished with a slight gain for the Bulls’ cause to at least hold the line to fight another day.  It has to be called a “disappointing fizzle” as the volume was pitiful and this was nothing but a token hold for the Bulls.  However the Composite %B of the Bollinger Bands for the Market Indexes is now 0.53, which is encouraging, since most successful rallies start from here.  So where do we go from here and what can change this to a positive emotion?  It  requires a double Impulse as we had last Thursday, and in a hurry:

The Major Challenge and Near-term Targets for the Bulls:

1.  We Must have another Eureka and Up Kahuna:  For any sort of recovery out of the mire, early next week must see a follow through with a simultaneous Eureka and Up Kahuna.  Although not perfect in the scheme of things as compared to previous strong rallies, it would be close enough to be acceptable.  Any more will be gravy.
2.  Given the above, the Composite %B will be approaching the Upper Bollinger Band
3.  Volume must be substantially stronger…over 2.5 Billion on the Nasdaq
4.  The VIX must drop another 4 to 5 points to 24
5.  The S&P 500 must deliver a >2% day and take the Index to about 1118…Fat chance say the Bears
6.  The Nasdaq must show Technology leading and a rise to 2320
7.  The DOW needs a 500 point gain to above 10,700
8.  AAPL must rise to above 264

Why even suggest such tough goals?  To show you the magnitude of the Challenge:

1.  Three words…Force SHORT Covering.  The Large Players are not budging.  Even then, the bulls will not be out of the woods, and I suggest you look back on my previous blogs to see why the Bears will again be laying in wait.
2.  Another reason is that June and July are poor months for successful rallies of any consequence, i.e., about 10% up over a five to six week period…thanks to my friend Mike Scott.
3.  The third reason is the THISPIG syndrome is not going away any time soon

Net-net:  Things are in the Balance and we must be patient to see how it plays out early next week.

Last but not least, work with what the market gives you and don’t try to force your views on it.

Best Regards, Ian.

Mail Bag:  Ray says  “AAPL is losing its lustre.  I think we need to find a new canary”

Ray:  You make a good point, and that is an easy call.  It’s right under our nose… NFLX; ERG of 286, 4th from the top on ERG, mighty strong, EPS Rank,  Rel Strength and Group Strength.

But that is not the purpose of the exercise.   The purpose of the JIRM Index was first to catch the early weakness, then to know whether the leaders were giving up the ghost and finally to know when the Market is DEAD.  However, I say don’t switch horses in mid-stream.  If this market is to go “DEAD”, AAPL will keel over long before NFLX…you mark my words, and I will certainly eat crow if I am wrong. 

By all means have two canaries…I can go along with that.  The purpose of selecting the key Canary was to smell the poison early, but with a strong stock that had Halo.  At the time, AAPL had the Halo, but subsequently it added to that Halo by announcing Stalwart Earnings. The poison of the market has now demonstrated several things:

1.  They are hammering Technology which was fat with profits of which AAPL was the surrogate
2.  They are ignoring the Great News on AAPL of a few days ago which announced 2 Million units of its latest product
3.  They are ignoring the latest news made just yesterday from our man Steve Jobs of its next product

Those three points speak volumes as to the major bias right now…downwards.  Therefore, with the added burden that the Market Indexes have now all registered an Intermediate Correction, I don’t have to tell you that we are decidedly at “Custer’s Last Stand” given the testing of the double bottoms on all the major Indexes today as Ron pointed out, and that AAPL is truly losing its lustre.  If it dies, so goes the market.  Of course there are always pockets of opportunity on the upside, but in the bigger picture, we will then be faced with the next question “What is The Road to Recovery?”  Very few Recoveries occur without Technology and Financial’s leading the way.  Retail helps, but not without the others.

From the work I have done it is now even more critical that we need not one, but two, Eurekas in succession and they must be accompanied by two Upside Kahunas.  “Why?”  Because no Intermediate Correction has recovered unless the %B was above the Middle Band and preferably at 0.6, and at this stage of the Game %B for the Composite of the ten Indexes we follow is only at 0.19.  I am not for one moment suggesting that given such a solid bounce we will be out of the woods, but at least we will have some cushion before a further collapse…should that occur:

Best Regards, Ian.

The last couple of weeks the Bulletin Boards have all been abuzz with the Follow Through Day (FTD) good stuff.  Worse luck the simple aspects of an FTD in the 4th through the 10th day (7th by those who are more cautious) is just not enough in these volatile times to be assured of a turn around, leave alone any form of a rally.  The so-called FTD lasted exactly one day before the Bears lowered the boom with a Phoenix on a -3%+ day in the Major Market Indicies.

I gave you the caution to watch for in my last blog for signs that there is at least a chance of a recovery.  But before we get to that, there are three types of “Game Player” in these modern times that we need to understand in the scheme of things:

1.  The latest buzz word is HFTs…High Frequency Traders who scalp pennies in nanoseconds with millions of shares and have become the bane of our lives, as we must find ways to understand their shenanigans with modern tools.

2.  The very short term Intra-day Trader who is used to the whims and fancies of the former and have learnt to stay on the right side of the market and can swing from long to short in seconds if need be.  They understand volatility in spades, have tools that can differentiate between Large Players and Small Players with regard to which side of the volume curve they are playing with due regard to price movement, and are accustomed to being glued to the futures that give them a leg up on which way the wind is blowing, intra-day.  Likewise, they are adept at looking at reverse ETFs and managing the “Chop-Chop” in spades.

3.  Then there are “usuns” who at least want re-assurance that when they get these signals from old tools of FTDs that there is at least a fighting chance they are signaling a decent call more than the 50:50 bet that one gets today.  Unfortunately, if the Financial Newspaper says it’s so, it is good enough for the herd to follow, and thereby usuns are realizing that there must be a better way.

If all of that is not enough, there is now the problem that news around the world is instantaneous to all and a supposed slip in a single “bet” of 1 Billion shares instead of 1 Million can cause what is now called the “Flash Crash” of a few weeks ago.

Many moons ago it dawned on me that John Bollinger’s Bands and specifically his %B and Bandwidth gave me just the type of Stakes in the Ground and Measuring Rods to help “usuns” to stay on the right side of the Market at those precious times when the Market provides High Volatility with swings of > + or – 2% to 4% days in price.   They gave me the ammunition to understand unusual turns in the Market both at the top and at the bottom with days when the standard deviation is >3% from the norm. 

 The outgrowth of the past ten years of work is the Impulse Indicators I have developed for you.  It didn’t take long for sharp minded people with equal interests to build on these concepts and this has produced a far better mousetrap with regard to FTDs.  People like Jerry Samet, Aloha Mike Scott, Tarzana Mike Scott, Bill Roberts and more recently Tom Ellis have all played a hand in at least knowing when the odds are with or against us.  Since these folks are generous givers to help the usuns along, here are three cardinal rules based on the tireless work they have done:

1.  80% of FTDs fail if there is no Eureka.  This one had an Eureka
2.  75% of FTDs fail if %B 1-Dy Chg is <0.18.  This one had >0.21 for the Composite of Market Indexes we follow
3.  80% of FTDs fail if %B is below the Middle BB.  All Major Market Indexes except the NDX were below 0.50

So you say two out three is not bad, until THISPIG by way of Hungary throws a spanner in the works and the Jobs Report turns out to be less than scintillating.  I’m sure we cannot account for what might happen say the intra-day players.  But, wouldn’t one think it prudent to wait before making the Official Call on a FTD when something as BIG NEWS such as the Jobs Report is only one day around the corner, and the call was made on just an iddy-biddy increase in Volume on that day on the Nasdaq and not the other Indexes? After all, the Value-In-Time folks knew better in that the Big Players had not covered their shorts!  This penchant for calling THE BOTTOM is the problem of Greed.  Now we sit with a Phoenix on Friday with heavy momo from negative Kahunas and all but the Nasdaq 100 and Nasdaq are below 0.20 on %B.

So, I leave you with the picture as it is today, and hope you find a pony in it as we have done for the last year:

Best Regards, Ian.