Ian Woodward's Investing Blog

Gene: As I understand, all the conditions of an early warning signal for a correction have been met as specified in Ian’s blog of May 3rd, 2009.  Am I correct?

Hi Gene:  You are correct about the Early Warning characteristics being met, but now everyone is wondering how severe it might be if confirmed to the downside; nobody knows for sure.  However, I can add to your observation and mine from last May as to what to look for, if the market is to go down further:

The Current Status

Please understand that the Market Internal Indicators we watch are still intact, though they have deteriorated considerably this past week.  Items such as the McClellan Oscillator is in deep negative territory at -247, while the Summation Index is holding at its trendline, the ABCDE statistics have also fallen off sharply, but have not broken down below required levels, and the % of stocks above the 200-dma is still at a healthy 91%, where its Line in the sand is at 87%.

The Immediate Future – Next Week

Given that context:

1.  The Phoenix we had on Thursday was THE Major shot across the bow.  It signifies that the Bears are gaining Control.
2.  We must NOT see a subsequent EUREKA as that would temporarily negate that the Bears are in control.  Alternatively, the Bulls are praying for a Eureka to stem the tide one more time.
3.  The 50-dma must be broken, but since it is the last vestige of support, the last hope for the Bulls is that the Nasdaq finds support at or near that level.
4.  Since the 50-dma is at 2032 and 6.3% below the recent high of 2167.7, we can tolerate a drop of 8% and not have too much damage done.  That would put us at 1994, so don’t be too alarmed if there is a slight break down below the 50-dma.

The Deterioration Signposts to Capitulation

5.  However, by then, we should expect the %B to breakdown below the Bandwidth.
6.  Last but not least, the true sign that things have turned for the worse is that the BONGO Weekly will have given up the ghost and turned from a solid green during this entire rally to RED.  At that point the inventors of Bongo, who include Robert Minkowsky, Dave Steckler, Jeffrey Scott, Lou Powers and David Galardi, will be whooping it up and saying “You see it does work and we made a valuable contribution to HGSI.”
7.  If we see another Phoenix by then together with a Kahuna (Pink or Red) to the downside, and no immediate response from an Eureka, the Party is really over and the Saw Tooth Plan will have lost a tooth or teeth!

8.  By this point in time, it pays to watch the RSI Indicator.  It is currently at the 43 level for RSI 14 and it will need to get down to below 30 to signal a Bingo.  I need hardly tell you that the Market will be in poor shape if and when that happens.  The Indexes will be headed for their 200-dma.
9.  The VIX would have shot through 30 to the upside and the Bears will be in full control.

 The Upside Scenario:

We get an immediate snap-back Eureka signaling the Bulls see an Oversold opportunity and are not prepared to hand-over control to the Bears just yet.  If we get two Eurekas in a row or within a day or two of each other, the Bulls are back in Control!

I repeat again, the Signposts, Stakes in the Ground and Measuring Rods we now have in place keep us on the right side of the market.  They tell us what to look for in the expected severity of the decline and the potential steps to recovery.

Thanks to many of you who have responded to my note on the change of venue…please reply immediately if you have not already done so; it does help me to help you.

…And that’s My Story for Today!

 Best Regards, Ian.

It is VERY RARE when I make an announcement on this Blog regarding HGS Investor matters, but it is important I get this  notice out to our clientele who are attending our next Seminar on October 24 to 26.  It has to do with a venue change and if it doesn’t apply to you, please ignore it.  I am sure you will understand:

Fellow HGS Investors and attendees at the October Seminar:

The Library was not able to accommodate us for all three days due to other festivities that clashed with our Seminar, but you will be pleased to learn that we have found a very suitable alternative location just 150 yards down below the Library on the same road that most of you are fully familiar with:

1.  The spacious and delightful meeting room gives us the ability to spread out
2.  It is approximately 1&1/2 times the size of the Library
3.  The seats are arm chair padded for far more comfort than before
4.  The arrangement will be four seats to each 5 foot round table, so that we don’t feel cramped
5.  We will essentially have the place all to ourselves at the weekend
6.  There is ample seating outside the meeting room and on the balcony for lunch and relaxation
7.  The audio visual provides for either two large screens or a single wall that is huge
8.  There is ample parking just above the meeting room and about 150 yards lower down the hill from the usual parking area you are so familiar with at the Library.
9.  We already have 60 total people including the HGSI Team and with another three weeks to go we can easily accommodate any late comers.  Please hurry and sign up if you intend to come.
10.  We will have all the usual amenities including wireless Internet, light dimming, heating/cooling system, sockets for all the laptops, beautiful kitchen, rest rooms, etc.
11.  It will be equally convenient to attend the dinner at Georgio’s restaurant on Saturday since we are a stone’s throw away as before.

I show directions below from the Courtyard Marriott, where most of you are staying.  One of the maps shows the relationship of this new venue with that of the Library.  The usual Landmarks of Silver Spur Road, Deep Valley Drive and Drybank Dr. are on the Map.  The location is at the RHCC Community Center, 735 Silver Spur Road.  Entrance to the Parking Lot is either on Roxco Dr. or Deep Valley Drive.

Best Regards, Ian.

You can’t say I didn’t give you enough warning in the newsletter and on this blog.
I have repeatedly shown you the value of the High Jump Indicator and once again
it has turned up trumps.  I explained in the Newsletter that the Nasdaq had not
exceeded 24% from its 200-dma since 2003 and then only four times at that.  I
also said that we were about to break 25% and if it did we would either swoon and
Pause to Refresh, or head into a Climax Run.  Well it peaked yesterday, and as the
pundits have said it was a classic reversal day and there is a follow through to the
downside again today.

For Posterity sake, so that you can review the bidding at a future date to know how and when to use this technique, I give you the Targets and Results at the Peak, and you can see it hit them spot on for the DOW and the S&P 500, and overshot less than 1.5% for the Nasdaq, NDX and NYSE:

You might ask “Is that the end of using the High Jump for this round?”  The answer
is “No”, but instead of focusing on the 200-dma as the next HIGHER target, you will
need to use the 50-dma and/or the 17-dma to figure out the next levels, should
the Market decide to go higher.  I will show you how at the upcoming seminar, so
that is something to look forward to.

The  two views of “The News & Plan in a Nutshell” and the “Saw Tooth Game Plan”
from the last blog are still fresh as a daisy, so review them and I won’t repeat them.
For completeness I show what transpired with the VIX today and you need to keep a  beady eye on this chart to see if it heads up to 28 like a rocket or subsides back into its shell as the momentary Fear turns into Complacency again.

Understand the action in the last hour yesterday and all of today says this was a
warning shot across the bow and you need to be on guard. 

This view of the VIX was taken at 10.20 am Pacific Time.

Best Regards, Ian.

Camp Sunshine is rubbing their hands with glee and they can do no wrong as they see their 401-Kegs turn again to 401-K’s almost 12 months later.  (For those who haven’t been regular visitors to this blog, please take a moment to have a laugh and scroll down to my Blog Note of Monday, October 6th, 2008.  Better yet, just type in 401-Keg in the Search Window and enjoy).  I had nearly 27,000 hits that month and it went around the world for a “relief humor” joke in what then turned out to be panic times with a Black Swan soon thereafter.  On the other hand Camp Gloom and Doom is waiting patiently for this Market to get into Nose Bleed Territory as they have been thwarted several times along the way, and are now licking their chops to “bring it on”…albeit one more time!

As followers of Ron and my efforts know we keep you informed with a balanced picture, we are not Soothsayers; but use Commonsense and the HGSI Software with its plethora of Proprietary Indicators to let the Market tell us where it is headed.  Furthermore, we let our respective Weekly Movies and Blog Notes do the walking for our talking.  Likewise, we don’t trumpet our wares very often, but this is a reminder of what you will get at the HGS Investor Seminar from October 24 to 26, and you have just five weeks to hurry, hurry, hurry for the last few seats!   Here is just a taste of what the attendees will be getting with several winky-winkies as well:

What was a calamity a year ago, has now turned out to be a Blessing as this Market has risen 61% for the S&P 500 from the Base Low of 667 last year.  The Black Swan is something few of us have experienced except the quick Knee Jerk back in 1987, until we go back to the Deep Depression of the 1930’s.  Oddly enough it has produced Opportunity in a cussid sort of way.  I refer you to the August Newsletter Picture of the Black and White Swan showing that that mighty fall of two weeks produced a Vaccum in Volume at that stage which spelt Future Opportunity when we got back to 1000 on the way back up.  The Message then was “In this Crazy Market, don’t count out a return to 1200 on the S&P 500.”  That would be an 80% gain!

Now hold your horses:  I have not taken leave of my senses, so here is the News and Game Plan in a Nutshell.  The Chart below says it all, and in a month’s time when we are feversihly preparing for the Seminar, we will see where we stand then:

Here is the Saw Tooth Plan which has worked successfully for all of us since its inception at the HGS Investor Seminar last March.  By the way…we make you work with us on Case Studies on these occasions.  It’s not all Beer and Skittles:

Now, let me give you two important charts for you to focus on as I busily trot off to keep working on the Seminar Material.   The first is my handy-dandy overlay chart that shows what the Nasdaq MUST DO for the Rally to continue.  That will give us a template to watch if it succeeds or fails:

At this stage of events, among all the Internal factors we watch carefully, the one that will give us the earliest warning of whether we have a runaway Bull Market or are heading for a correction, be it shallow or deep is the VIX.  Its Performance these last few weeks has played right into our hands:

Enjoy, and keep your powder dry. 

Best Regards, Ian.

When there is a chorus saying “It can’t possibly go higher”, the Market confounds us and it does.  At times like these we see the gurus bringing out their trusted tools of Gann Wheels and Chart Patterns from the past such as the latest one to hit the airwaves of “Three Peaks and a Domed House”, and eventually it comes to pass.  In the meantime, the Market continues to go up, and those shorting the market find themselves having to cover time and time again.

I prefer to use a simple tool which I called “The Ian High Jump Indicator” – © Ian Woodward.  The concept is to look at a panoramic picture of how the stock has behaved over time relative to the extension from the 17 Day MA, the 50 Day MA and the 200 Day MA – the very yardsticks we use to decide when to buy and sell stocks using moving average crossovers. The HGS Investor Software program (HGSI) provided by Industry Monitors incorporates this feature in its Charting Module, so it plots it for you. They also provide the individual extensions and the High Jump numbers in the Fundamental Ranking Module, so that these are all done automatically for you.

You might wonder why I call it the Ian High Jump Indicator.  If you look at a panoramic picture of any stock or any Market Index, it is an interesting fact that at certain times in a stock’s drive up from its base low, the stock or Index will invariably come to rest at the same peaks and valleys. These peaks are rarely beaten and more importantly, are at around the same level though they may be reached three or four years apart. We all know that the world record for the High Jump is 8 ft. & 1/2 in. and the chances of that being exceeded are small, except when the Olympics or World Track and Field meets occur.  In other words, they are difficult benchmarks to exceed.  The same occurs with stocks and Market Indexes when it comes to the degree of extension over the years.  They usually peter out at around the same levels; usually one can see three, which I call High, Higher and Highest.  Understand that these highs do NOT mean that the stock is about to “die”; but it does mean that the stock is about to correct. 

With that introduction, here is an exercise that gives us reasonable boundaries of extension for the Nasdaq Index.

1. What is the highest jump from the 200-dma since 2000? The answer is 24.5%.

2. When did that occur?  Back in 2003 around September 18.

3. How many times did it exceed 24%?  Three times back then.

4.  How long did it consistently stay above 20%?  From 8/29/2003 to 9/23/2003 and  again from 10/3/2003 to 11/7/2003 (with just a few days below 20%) when it went from a high of 1813.82 to 1992.27 for a further gain of nearly 10%.  The bottom line is that if this market trundles along and surprises everyone, it can meander its way for another 10% up.

5.  Where is it now?  23% up on the 200-dma.

6.  How often has it exceeded 24% during this rally?  Once, on 8/28/09 when it reached 24.04%

7.  How consistent has this drive been from the 200-dma?  Since 7/23/09 it has stayed in a range of 18.47% to 24.04% (on 8/28/09), which is very consistent.

8.  If there is to be another top what should we look for?  A Total High Jump of 40%, the 200-dma over 24%; the 50-dma at 10% and the 17-dma at 6% (BETWEEN FRIENDS).  Can it go higher?  Of course, but let’s first take one small step for HGS Investors.

9.  Where does that put the Nasdaq at that time?  The 200-dma is currently at 1679.13, so 24% to 25% up from there gives us 2082 to 2099 (say 2100, between good friends).  It hit 2084 today.

10. Does that mean the Market dies there?  No, but it should correct, especially if it reaches 2100.

11. How big will the Correction be?  NOBODY Knows…don’t let fear take you out.  What does the High Jump tell you:

     a.  If it corrects to a 200-dma reading of 18.47%, it will go down to 1989, or just below its 17-dma.  I am sure you will recall that all Great Leaders rise above the 17-dma.   No panic at that stage since if it even reaches 2100 that would be about a 5% correction.

    b.  8% down would take us to 1932, which is just below the 50-dma and is currently at 1941, so just below.  Again, no biggie, but the Bears may now be in control, and out will come the hue and cry that “I told you so” and we are headed for the deep correction that the Gloom and Doom Camp have been touting for ages.

   c.  Anything worse and they are correct as the sentiment will change from Bullish to Bearish.

The bottom line is that there are many ways to get your arms around this beast, but at critical points in time, there is no simpler and better tool to guide you than the High Jump, WHEN THE INDEX HAS WORKED IN A TIGHT RANGE.

12.  Lastly, I specifically chose 2003 since that is the current best Measuring Rod.  It can go on up for three more months if that is any guide.

Where am I…In Camp Light on Your Feet for now.   It’s not difficult.

Best Regards, Ian.