Breakoutwatch Compared to CAN SLIM®
We started breakoutwatch.com in 2001 to provide the CAN SLIM® investor
with rapid access to watchlists of stocks that were in the chart
patterns identified in "How to Make Money in Stocks" by William O'Neil as being the ones
with the most potential on breakout. At the time, it was necessary to
subscribe to Daily Graphs and browse thousands of charts to find those
in the desired patterns. It also required a detailed understanding of
the various chart patterns in order to be able to recognize them. Once
you found the charts you then had to perform your due diligence to
determine which charts met the CAN SLIM® guidelines.
Breakoutwatch.com provided a unique service that combined
identification of the CAN SLIM® recommended chart patterns with an
evaluation of each stock's technical and fundamental condition against
CAN SLIM® principles. We originally called this evaluation our "CANSLIM
Evaluator" but were forced to change that term when Data Analysis, Inc. successfully
registered CAN SLIM® as a trademark. Recognizing that we were emphasizing technical analysis and adding timing to the methodology, we
adopted the CANTATA acronym standing for Current earnings, Annual growth, New highs, Technical Analysis and Timing Assistance.
In our documentation we use the terms cup-with-handle and cup-and-handle interchangeably and designate them with the acronym CWH.
Since 2003 we have developed a daily history of stocks in the
cup-with-handle chart pattern (which appeared to be O'Neil's
favorite), and others, that have allowed us to compare the performance
of stocks that broke out from the cup-with-handle pattern against the
CAN SLIM® principles. This history covers almost 600,000 cup-with-handle patterns over eighteen turbulent years of bull
and extreme bear markets and allows us to draw some conclusions about
what works and what doesn't. Here are some of the most important areas
where we differ with CAN SLIM®.
There are areas where our research has confirmed some CAN SLIM® principles. These are:
- In How to Make Money in Stocks, O'Neil suggested that a breakout should only be condidered if the daily volume on breakout was 150% of the 50 day average volume. We found that using this minimum missed many successful breakouts. Consequently, we changed the criteria by which we recognize a breakout. See Breakout Volume No Longer Required for "Breakout" Designation
- Lower priced stocks give better returns than higher priced ones. By
using the CAN SLIM® recommendation of a $12 minimum we found you were
losing 60% of your potential gains compared to the minimum price of $6 we require for inclusion on our watchlists.
- Relative Strength Rank of at least 80 is too low. While there certainly are profitable breakouts at this level, we found a RS
Rank of at least 90 was necessary to give returns after
breakout of at least 25%.
- Industry Rank has no correlation with subsequent performance
after breakout and can be safely ignored when selecting a breakout
stock for purchase. High performing breakouts can come from any
- While stocks that ranked higher in their industry are more likely
to breakout, their rank within industry was not correlated with a
better performance after breakout.
- CAN SLIM®
recommends minimum levels for the growth in earnings,
sales, institutional ownership, ROI, and so on (see our CE for a
complete list of these metrics and minimum criteria) but we found none
of them to be statistically significant except for the two mentioned below. While
these may all be useful metrics for identifying strong stocks for the
buy and hold investor, they had no perceptible influence on the
subsequent performance of a cup-with-handle breakout.
Remember, these points of agreement and disagreement apply only to cup andd handle pattern stocks,
not to all growth stocks that might be identified by the CAN SLIM®
method. However, since CAN SLIM also emphasizes the importance of
timing your entry, we think these guidelines, when applied to CAN SLIM®
style stocks will produce better returns. You can verify this for
yourself using our cup-with-handle backtest tool.
- Breakouts will perform better when the market trend is up. It is
better to avoid buying breakouts when the trend is flat or down.
- Use of stop loss orders is essential and the 7-8% stop loss
recommendation is a good one. This should be converted to a trailing
stop order once the stock has gained 5% or more above breakout. We prefer using a trailing stop adjusted daily using Average True Range
- Two fundamentals have a definitely positive influence on
performance after breakout: Last two quarters earnings must be positive
and earnings growth rates must have increased in each of the last four quarters.
- A minimum average daily volume is necessary to provide adequate
liquidity. The CAN SLIM® recommendation of 100,000 ADV provides better
performance after breakout than the minimum of 30,000 we use for
inclusion on our watchlists.
The criteria ideal for a strong breakout are:
- Minimum RS Rank of 90
- Breakout day volume is not important provided the stock closes above the breakout price
- ADV must be at least 100,000 but we find 1M to provide better longer term performance
- Last two quarters earnings must be positive
- Last four quarters must have shown accelerating earnings
Further reading from our weekly newsletter:
- set a stop loss at 8% of the breakout price
- move the trailing stop up using Average True Range after the stock has gained at least 5%
CAN SLIM (CANSLIM) is a registered trademark of Data Analysis, Inc.
BreakoutWatch is not affiliated
with Investor's Business Daily or with Mr. William O'Neil.
Our site, research and analysis is supported entirely by subscription
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