Weekly Newsletter 01/13/07
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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  

Market Summary

Expectations of an early cut in interest rates to stimulate a flagging economy are now almost extinguished. This expectation helped sustain stock prices in recent weeks but a different dynamic is now fueling the New Year rally. Retail sales in December announced on Friday were markedly higher than expected showing that consumer spending is still strong. With energy prices falling, it is likely that spending will remain strong as consumers have more disposable income to spend on other goods and services. Lower jobless claims announced on Thursday showed that employment is also holding up, and although there is a potential for wage push inflation stemming from full employment, lower energy prices will provide an offsetting effect. The indications are that the economy is robust and investors are now betting that corporate earnings will remain healthy through 2007, particularly the new economy stocks represented on the NASDAQ. The DJI closed at new highs on Thursday and Friday to gain 0.75% for the week. The NASDAQ was by far the stronger performer, though, with a 2.82% gain for the week as it moved higher each day racking up three accumulation days in succession. The S&P 500 closed 0.88% higher.

Last week we saw a potential head and shoulders pattern developing on the NASDAQ. This pattern is bearish, if completed, but this weeks action first took out the right shoulder resistance on Wednesday and then the head on Friday to set a new 6-year high. The index is now tracking the upper Bollinger Band, and although we might expect a pullback to within the band, the Percent Volume Oscillator (PVO) is above zero indicating that the current upward trend will be maintained in the short term.

The number of breakouts shot up to 40 this week from just 12 last week. Incyte Corp. (INCY) broke out from cup-with-handle formation on Tuesday and gained 18% by Friday's close. INCY was also a pick on our TradeWatch Buy at Open list. Shaw Communications (SJR) also made double digit gains after a cup-with-handle breakout on Wednesday and closed 13.5% higher.

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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

Which Technical and Fundamental Factors have the Most Influence on Maximum Gains?

This week, we look at the factors having the most impact on breakout success. Once again, this topic was suggested by a subscriber and we encourage suggestions for this section of our newsletter.

Recognizing that our subscribers have different investment time frames and that there could be different factors at work in the short, medium and long term, we looked at those factors which were the best predictor of gains achieved over 1 week, 1 month and 1 year. As you might expect, there is some variation in the factors that are important as we look at these different time frames. Technical factors and pattern characteristics tend to be very import in the short term, while fundamental factors begin to have an influence over the medium term although it is the initial boost given by technical factors that are always the most important predictor of the best gains.

The methodology we used for this analysis was a technique called 'stepwise regression'. This is a multiple regression technique which selects the best explanatory variables for a statistical model when there is a large number of potential variables that could influence the dependant variable (see Wikipedia). In our case we have 34 possible explanatory variables to choose. These are listed at the end of this article.

We looked at all cup-with-handle breakouts in the two years 1/2/04 to 12/30/05 and measured the maximum intra-day high achieved within 1 week after breakout, 1 month after breakout and 1 year after breakout. If a breakout failed, that is fell by at least 8% from its breakout price, then it wasn't considered beyond the date on which it failed. For example, if a breakout failed two weeks after its breakout date, then the maximum gain for the 1 month and 1 year time frames was limited to that obtained in the first week. This was so as to exclude cases where a failure subsequently went on to make significant gains over a longer period.

In order of importance, the stepwise regression selected variables in order of importance as follows. Variables not shown were not statistically significant and were excluded by the stepwise process.

Dependant Variable

Explanatory Variables* Selected by the Regression

Explanatory Power

1 Week Max. Gain %
(Mean: 7.3; S.D: 7.3)

RS Rank, BOvolRatio, Handle Depth, Handle Length, Inverse BoP, VADVR, CET1, CEF3, Cup Length, Cup Depth

61%

1 Month Max. Gain %
(Mean: 12.8; S.D: 12.3)

RS Rank , BOvolRatio, inverse BoP, CET1, Handle Depth, CEF1, Handle Length, VADVR, CEF7, M_SPX, RCQ

60%
1 Year Max. Gain %
(Mean:45.6; S.D: 48.4)

RS Rank, Inverse BoP, CEF3, M_SPX, CET1, BOvolRatio, Handle Depth, CEF2, HQ, industryRankCT

52%

As you can understand, the range of gains for each period is quite large as the mean and standard deviation (S.D.) numbers show. The 'Explanatory Power' is a measure of how much variability in the range of gains is explained by the model. We find the following points of most interest:

  1. Over all time frames, Relative Strength Rank is by far the most important variable. For the 1 week gain, it explained 51% of the 61% that all variables together explained. For the 1 month gain, its importance rose to explaining 54% and for 1 year it explained 48% out of the 52% explanatory power of the regression model.
  2. Note that the volume on breakout day (BOvolRatio) is the second most important variable in the 1 week and 1 month cases, but is much less significant over a year.
  3. The model found inverse breakout price useful, particularly over the 1 year horizon where it moved into second pace. In other words, lower priced stocks will make the biggest gains.

*Possible Explanatory Variables

Cup with Handle Indicators
Breakout Price (BOP), Inverse Breakout Price (Inverse BoP), Pivot Depth, Handle Length, Cup Length, Handle Depth, Cup Depth, RCQ (Right Cup Quality), HQ (Handle Quality), CQ (Chart Quality), PVI (price/Volume Indicator), VADVR (Volume to average volume ratio on day before breakout), BOvolRatio (Volume to average volume ratio on day of breakout), Retracement (from base low)
Technical Indicators
CET1 (price relative to 50 and 200 dma), CET2 (Relative Strength Rank), CET3 (Rank in Industry), CET4 (% off 52 week high), CET5 (Up/Down Ratio), industryRankCT (Industry Technical Rank)
Fundamental Indicators
CEF1 (Q to Q Earnings Growth), CEF2 (Positive Quarterly Earnings), CEF3 (Q earnings Growth Acceleration), CEF4 (Y on Y Earnings Growth), CEF5 (Q on Q Sales Growth), CEF6 (Q Sales Growth Acceleration), CEF7 (Forward Earnings Growth), CEF8 (Institutional Ownership), CEF9 (Return on Equity), CEF10 (Cash Flow), CEF11 (Net Margins)
Market Conditions
NASDAQ Market Signal, M_IXIC (M indicator for NASDAQ), M_SPX (M indicator for S&P 500)

Investment Advisors Using our Service

TradeRight Securities, located in a suburb of Chicago, is a full services investment management company and broker/dealer. They have been a subscriber, and user, of BreakoutWatch.com for some time now. They practice CANTATA and use Breakoutwatch.com as a “research analyst”. You can learn more about TradeRight Securities at: www.traderightsecurities.com. If you’re interested in speaking to a representative, simply call them toll-free at 1-800-308-3938 or e-mail gdragel@traderightsecurities.com.

PivotPoint Advisors, LLC takes a technical approach to investment planning and management. A breakoutwatch.com subscriber since May, 2004, they use breakouts, market signals, and now TradeWatch to enhance returns for their clients. Learn more at http://pivotpointadvisors.net or contact John Norquay at 608-826-0840 or by email at john.norquay@pivotpointadvisors.net.

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 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Market1
Signal
Dow 12556.1 1.28% 0.75% enter
NASDAQ 2502.82 2.82% 3.62% enter
S&P 500 1430.73 1.49% 0.88% enter
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
NASDAQ Composite
2.82 %
NASDAQ Composite
3.29 %
NASDAQ Composite
2.76 %
NASDAQ Composite
3.62 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Major Airlines Major Airlines Tobacco Products, Other Beverages - Brewers
 Most Improved Industry (by change in technical rank2)
Aluminum
+ 54
Aluminum
+ 99
Long Distance Carriers
+ 213
Long Distance Carriers
+ 210
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 40 28.62 2.21% 0.91%
Last Week 12 30.54 2.09% -3.19%
13 Weeks 424 32.85 13.02%
5.41%
Sector
Industry
Breakout Count for Week
FINANCIAL SERVICES
Closed-End Fund - Equity
7
INSURANCE
Property & Casualty Insurance
4
COMPUTER SOFTWARE & SERVICES
Information Technology
2
DRUGS
Biotechnology
2
ELECTRONICS
Diversified Electronics
2
AEROSPACE/DEFENSE
Aerospace/Defense Products & Services
1
BANKING
Savings & Loans
1
BANKING
Regional - Pacific Banks
1
CHEMICALS
Specialty Chemicals
1
CHEMICALS
Chemicals - Major Diversified
1
COMPUTER SOFTWARE & SERVICES
Multimedia & Graphics Software
1
CONSUMER NON-DURABLES
Paper & Paper Products
1
DIVERSIFIED SERVICES
Management Services
1
ELECTRONICS
Semiconductor - Broad Line
1
ELECTRONICS
Scientific & Technical Instruments
1
FINANCIAL SERVICES
Asset Management
1
FINANCIAL SERVICES
Closed-End Fund - Foreign
1
FINANCIAL SERVICES
Closed-End Fund - Debt
1
FOOD & BEVERAGE
Processed & Packaged Goods
1
HEALTH SERVICES
Medical Instruments & Supplies
1
MEDIA
CATV Systems
1
MEDIA
Broadcasting - TV
1
REAL ESTATE
REIT - Residential
1
RETAIL
Grocery Stores
1
TELECOMMUNICATIONS
Diversified Communication Services
1
TELECOMMUNICATIONS
Wireless Communications
1
TRANSPORTATION
Regional Airlines
1
TRANSPORTATION
Shipping
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 SWKS Skyworks Solutions Inc 88
Top Technical PRGX Prg-schultz Intl Inc 57
Top Fundamental WRLD World Acceptance Corp 31
Top Tech. & Fund. WRLD World Acceptance Corp 31
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 DTPI Diamondcluster Intl Inc 67
Top Technical ONNN On Semiconductor Corp 63
Top Fundamental STP Suntech Power Holdings Co Ltd 35
Top Tech. & Fund. STP Suntech Power Holdings Co Ltd 35
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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