Weekly Newsletter 06/04/05
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Market Summary Weekly Breakout Report Top Breakout Choices Top 2nd Chances New Features Tip of the Week
Prior editions of this newsletter with our valuable Tips of the Week are available here.
 Weekly Commentary  

Breakoutwatch.com Reviewed in Stocks & Commodities Magazine

Technical Analysis of Stocks & Commodities magazine editor, Jayanthi Gopalakrishnan, reviewed breakout watch.com for the June issue of the magazine. You can read the review here.

 

Market Summary

A series of conflicting economic numbers and rising oil prices introduced uncertainty into the markets this week with the result that sellers were in control by the end of the week and the markets lost ground. This was the first loss in three weeks for the DJI and S&P 500, which closed down 0.77% and 0.23% respectively, and the first loss in 5 weeks for the NASDAQ which closed down 0.21%. Despite this week's minor setback, the NASDAQ is still the most bullish of the indexes with accumulation exceeding distribution by the healthy margin of 11 accumulation days to just 3 distribution days since the current rally began on April 29. We noted last week that weekly volume has been trending downwards on the NASDAQ and that trend continued this week. The trend is also evident on the other indexes, as shown on the weekly charts below. We also noted last week that decreasing volume combined with rising prices could be a sign that the upward trend was weakening and that seems to have been confirmed this week. Until price and volume trends start moving in the same direction, we are likely to see predominantly sideways movement.

In view of the increasing evidence of a slowdown in economic growth, the markets will be watching Federal Reserve Chairman Alan Greenspan's testimony to Congress on the economy next Thursday for signs that the Fed could change its policy stance on interest rates. Any indication that the Fed may not raise rates at its next Open Market Committee meeting on June 29-30 could give the markets a boost.

Breakouts

Breakouts continued to perform quite strongly with 43 being confirmed this week across a broad base of sectors. SIRF, which had attempted to breakout of a CwH pattern on 5/26, did so strongly on 6/1 and then gapped up on 6/2 to gain 17.2% over its pivot before slipping back to close for a 9.9% gain. OTTR broke out of a flat base on Monday and volume stayed well above average levels all week enabling the stock to gain 8.3% at Friday's close. RADS, which has gained nearly 100% since appearing on our CwH list in February, broke out of a 3 day handle on Wednesday to rise 9.8% before slipping back for an overall gain of 7.2%.

There were no breakdowns this week.

Industry Analysis

Healthcare-Hospitals continued to be the top performing industry as measured by our technical criteria, with Transportation-Equipment Manufacturers being the most improved, rising 64 points in the rankings to position 48 out of our 192 industry groups.

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 New Features this Week Additional Value that we added this week

There were no new features added this week.

This Week's Top Tip Tips for getting the most out of our site

Technical Condition vs. Fundamental Condition Update

On 4/30/05 we reported in this newsletter that technical condition outweighed fundamental strength with breakouts from zone 4-3 outperforming zone 4-4 during 2005. (For an explanation of our zone methodology see here). I was asked to apply the same analysis to all stocks since April, 2003 when our current CwH algorithm was implemented, so here it is.

We analyzed all stocks that were on our CwH watchlist since April, 2003, counted the number of breakouts and assessed each breakout as a success, a failure or undetermined:

  • to be successful, a breakout had to close for a gain of at least 5% over its pivot following the breakout
  • to be a failure, a breakout had to fail to meet the success threshold, and then fall to an intraday low of 8% below the pivot (equivalent to assuming a 8% stop-loss order).
  • to be undetermined, a stock had to remain within the range -8% to +5%.
  • if successful, the gain following breakout was measured as the difference between the breakout price and the subsequent highest closing price.
  • if a failure, the gain following breakout was set at -8%.
  • if indeterminate, the gain was set at 0%.
  • these gains were categorized within the ranges <8%, 0-5%, 5%-20%, 20%-50%, 50%-100%, >100%

The results are summarized in the table below. To see how the distribution of gains was distributed for each zone, click on the Avg. Gain number for the zone (only available where the number of breakouts was significant - indicated by a value in blue underline).

W/L Count => Number of stocks on the CwH watchlist in the zone. A stock is counted only once in each zone but can appear in multiple zones.
B/O Count => Number of breakouts from that zone.

Observations

  1. There are no breakouts in the CET 1 column in part because we screen for a Relative Strength Rank >= 70 before placing a stock on our watchlists.
  2. The high return for breakouts in the CET 2 column and Zone 3-1 cannot be relied on, because of the small number (3) of observations.
  3. The average gain of breakouts in the CET 3 and CET 4 columns exceeds the average gain of breakouts in the CEF 3 and CEF 4 rows, confirming our earlier conclusion that technical strength is a better indication of subsequent breakout performance than fundamental strength.
  4. The methodology used here is more conservative than that used for the performance report on the site, so the results are not strictly comparable.
  5. The Zone with the least number of failures, and also giving the highest return, was Zone 4-1.
  6. The zone with the highest percentage of failures was Zone 3-3 with 31%. However, the relatively small number of breakouts in the CET 3 column, 182 compared to 2197 in the CET 4 column, makes any conclusions drawn from the CET 3 results suspect.
  7. 92% of breakouts came from stocks with CET Zone score of 4, whereas only 27% came from a CEF Zone score of 4.

Conclusion

Technical strength is a better predictor of likely breakouts than fundamental strength and strong technical strength stocks are likely to make stronger gains than strong fundamental strength stocks.

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 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Market1
Signal
Dow 10461 -0.77% -2.99% enter
NASDAQ 2071.43 -0.21% -4.78% enter
S&P 500 1196.02 -0.23% -1.31% enter
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
NASDAQ Composite
-0.21 %
NASDAQ Composite
0.72 %
NASDAQ Composite
4.64 %
S&P 500
-1.31 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Healthcare-Hospitals Healthcare-Hospitals Healthcare-Hospitals Oil & Gas-Drilling
 Most Improved Industry (by change in technical rank2)
Transportation-Equip Mfg
+ 64
Transportation-Equip Mfg
+ 71
Food-Dairy Products
+ 103
Food-Dairy Products
+ 124
Charts of each industry rank and performance over 12 months are available on the site

1The Market Signal is derived from our proprietary market model. The market model is described on the site.
2The site also shows industry rankings based on fundamentals, combined technical and fundamentals, and on price alone (similar to IBD). The site also shows daily industry movements.
 Weekly Breakout Report How confirmed breakouts performed this week
# of Breakouts
Period Average1
Max. Gain During Period2
Gain at Period Close3
This Week 43 23.62 4.71% 1.2%
Last Week 35 23.85 7.82% 3.48%
13 Weeks 370 27.15 9.41%
2.62%
Sector
Industry
Breakout Count for Week
Electronics
Electr-Semicndtr Mfg
3
Telecomm
Telecomm-Equipment
3
Computer
Computer-Integrated Sys
2
Computer Software
Comp Software-Enterprise
2
Insurance
Insurance-Prop/Casualty/TItl
2
Real Estate/ REIT
Real Estate-REIT
2
Retail
Retail-Apparel
2
Utility
Utility-Electric
2
Aerospace & Defense
Aerospace & Defense-Equip
1
Banks
Banks-Foreign
1
Building
Building-Residentl/Comml
1
Building
Building-Heavy Constr
1
Business Services
Business Svcs-Misc
1
Computer
Computer-Networking
1
Computer Software
Comp Software-Healthcare
1
Computer Software
Comp Software-Desktop
1
Electronics
Electr-Semicndtr Equip
1
Finance
Finance-Misc Services
1
Finance
Finance-Consumer Loans
1
Healthcare
Healthcare-Products
1
Healthcare
Healthcare-Instruments
1
Internet
Internet-E:Commerce
1
Leisure
Leisure-Products
1
Machinery
Machinery-Matl Hdlg/Autom
1
Machinery
Machinery-Const/Mining
1
Media
Media-Diversified
1
Oil & Gas
Oil & Gas-Prod/Pipeline
1
Pollution Control
Pollution Control-Services
1
Retail
Retail-Restaurant
1
Retail
Retail-Home Furnishings
1
Telecomm
Telecomm-Wireless Services
1
Textile
Textile-Apparel Mfg
1
Transportation
Transportation -Airlines
1
1The average number of breakouts in each week over the previous 13 weeks.
2This represents the return if each stock were bought at its breakout price and sold at its intraday high.
3This represents the return if each stock were bought at its breakout price and sold at the most recent close.
 Top Breakout Choices Stocks on our Cup-and-Handle list with best expected gain if they breakout
Category
Symbol
Company Name
Expected Gain1
Best Overall HYC HYPERCOM CORP 110
Top Technical CCRD CONCORD COMMUNICATIONS INC 35
Top Fundamental CTGI CAPITAL TITLE GROUP INC 87
Top Tech. & Fund. CTGI CAPITAL TITLE GROUP INC 87
1This is the gain predicted by our Expected Gain model if the stock breaks out. Expected Gains for all cup-and-handle stocks are published on our site.
 Top Second Chances Stocks that broke out this week and are still in buyable range
Category
Symbol
Company Name
Expected Gain1
Best Overall ANTP PHAZAR CORP 101
Top Technical MTH MERITAGE CORP 41
Top Fundamental CRM Salesforce.com Inc. 68
Top Tech. & Fund. CRM Salesforce.com Inc. 68
1This is the gain predicted by our Expected Gain model after the stock has broken out which uses the volume on breakout as a predictive term. Because the model variance is +/- 38% the expectation can be negative.

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