Warning Shot Fired Across Bow

Market in Correction

Warning  Shot Fired Across Bow

We know that the worldwide economy has been slowing down.  Verification of that fact came today with negative earnings reports from Google and other companies. Negative earnings reports are now coming from all the S&P sectors, but in particular, the high tech and commodity sectors.

The uncertainty created by the Euro Zone problems, the upcoming Presidential Election and the perceived dire consequences of the looming Fiscal Cliff, especially when coupled with the bad earnings reports, are proving to be too much for the markets to bear. So, we got a big sell-off today.

Our  impulse indicators flashed a strong warning signal that the market is very vulnerable; the downside risk is very high in the days ahead.  Heavy institutional selling causes our impulse indicators to turn dark red. In other words, the large players are leaving the market in a big way.

Bucketology

What a strong sell signal looks like.

Ian Woodward, HGSI Group Mentor, is the creator of our market direction model. He developed this methodology over the last 30 years and it is very effective at keeping us on the right side of the market. It is based on an enhancement of John Bollinger's Bollinger-Band theory.

The chart below represents the daily price movement of the S&P 1500 Composite Index. Roughly 90% of the time the price movement of the index stays within the confines of the upper and lower bands (Bollinger Bands). A certain amount of volatility is normal and should not be of concern. A large move in price in a single day, on the other hand, gets our attention. These large moves reveal themselves when a longer than normal daily price bars shows up. A solid colored daily price bar tells us that the index price began the day trading at the top of the bar and closed at the low end of the bar, in other words the price declined.

Ian divides the distance between the upper and lower Bollinger Bands by 10. He calls these  subdivisions %B Buckets. He also adds an additional bucket above and below the Bollinger Bands.

The distance between the Bollinger Bands is divided into subdivisions that Ian calls %B Buckets. A price skips down 4 buckets or more in a single day is a rare event and provides a strong warning of trouble ahead. Today we had a 5+ bucket skip down. This kind of big price movement tells us that the Large Player Institutions are unloading stocks and stocks will be driven down.

The following chart paints a long red line through the index price chart when we have a 4+ bucket skip down day. Notice how, in most instances, it proved to be a very timely sell signal.  This is the chart that helped us sidestep the 20% decline that occurred in July 2011.

This blog post does not constitute an offer of investment advice. This blog is only provided for educational purposes. Please read the Important Blog Disclosure posted in the right channel bar.