The NASDAQ Composite crashed through support last Tuesday but the upward trend was restored on Wednesday in response to the FOMC reaffirming that the current target range for the federal funds rate was appropriate and also delaying parts of the Volcker rule until 2017. This ensures that the big financial institutions can continue to run up the equities markets for the foreseeable future and loans for small businesses and housing will remain in short supply. After all, why make risky loans when one can borrow from the Fed at effectively negative interest rates and make 12+% in the stock market. The above average volumes since Wednesday indicates that this reversal has plenty of support. The index closed at 4765 and looks as though it could test resistance at 4810 shortly.

No New Features this Week
 

Focus Due Diligence on High RS  Cup and Handle Stocks

The two strongest breakouts this week were MGNX with an RS of 91 on the day before breakout and FPRX with an RS of 98 on the day before breakout. Both were from a cup and handle pattern.

Over the 12 years this site has been operational, I have consistently found that the most important factor in determining performance after breakout is Relative Strength Rank (RS) and that the most reliable pattern is the cup and handle.

Stocks with ab RS of 90 or above have consistently outperformed 90% of the market over the last 12 months. While this is no guarantee of future performance, the data shows that this performance does tend to continue on the average.

For this reason, I recommend that when doing your due diligence on stocks on our watchlists, you focus firstly on the cup and handle watchlist and look for stocks with an RS rank of 90 or above.

RS Rank Formula

RS Rank is a gauge of a stock's price performance vs. all other stocks in the NYSE, AMEX and NASDAQ. The change in each stock's price for each of the previous four quarters is used to derive a weighted price performance for each stock. This weighted price performance is then used to rank all stocks against each other. Each stock is then given an RS Rank from 99 (highest) to 1 (lowest). This value is updated daily, so is a dynamic indicator of relative performance against all other stocks given the latest closing prices.

Formula for determining RS Rank:

Weighted Price Change = (Price change this quarter * 40%)

+ (Price change 1 qtr ago * 20%)

+ (Price change 2 qtrs ago * 20%)

+ (Price change 3 qtrs ago * 20%)

When less than 4 quarters of data are available, 3 quarters are weighted 50%/30%/20%; 2 quarters are weighted 60%/40%; and one quarter or less is weighted 100% on the available data.