Our market model for small cap stocks turned down again this week and it looked as if we were heading for a test of last November's low. However, the market rallied on Thursday and Friday following release of the second $350 billion of TARP funds and further details on the $850 billion Obama stimulus package. Bailout funds for Bank of America, Citibank and Chrysler financials also helped to turn the tide.

Under 'normal' circumstances, we would consider Thursday's market action, when it recovered from a steep loss to close higher, day one of a new rally and would be looking for a follow-through day as early as next Tuesday to confirm the rally. As it happens, next Tuesday is also Inauguration Day, so we may well get an apparent follow-through day that will fuel the rally for a while longer. This would therefore seem to be a short term buying opportunity but we expect it will be another bear-market rally with another sell-off to follow, so take your profits early!

As you can see from our New Features and Top Tip below, the Head and Shoulders Bottom pattern has delivered some profitable breakouts recently and should not be overlooked. The beta version of this watchlist is open to all subscribers and guests for a little while longer.

Backtest Option Added to New Watchlist Format

We have continued to enhance our new watchlist format with the addition of a backtest feature. This is very similar to the backtest option that has been available for the cup-with-handle watchlist for several years.

To use the backtest feature on the H&S Bottom watchlist, choose the Mine for Candidates > Long Positions > H&S Bottom (beta) menu choice. You then access the filter setting by choosing the 'Filter Settings' tab.

Enter the filters that you want to test and then set the number of days over which to run a backtest and click the 'backtest' button.

Use the New HSB Filters to Find Promising HSB Breakouts

As you can see from the results shown above, the Head and Shoulders Bottom list has produced some outstanding winners in the last three months. All the breakouts gained at least 5% (hence the zero fails number) and the average of all HSB breakouts was 27.5%. using a filter of a minimum RS rank of 60 improved the average return with three breakouts gaining over 70%.