Weekly Newsletter 02/19/05
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Market Summary Weekly Breakout Report Top Breakout Choices Top 2nd Chances New Features Tip of the Week
 Weekly Commentary  

Announcement: A new service, ShortsaleWatch, will debut in the next couple of days. See this week's Top Tip for further information

The three major indexes were slightly down this week and although the DJI held on by its fingernails to a positive gain of just 0.02% for the year, the others are still underwater.

The DJI is looking the healthiest of the three indexes. Although it suffered two distribution days this week (see our equivolume chart below) the DJI finished strongly helped by good news for the drug industry from the FDA. The DJI makes a clean sweep of the best performing major indexes over the last 26 weeks. Nevertheless, the DJI appears to be consolidating in the short term.

Last week we said we expected the NASDAQ to have difficulty clearing resistance at the 50 day moving average level and this was confirmed on Tuesday when a strong rally met overhead supply at that level and sellers took control causing the index to lose most of the day's gains. The downward trend continued and the index suffered a distribution day on Thursday. Light volume on Friday ahead of the long weekend saved the index from substantial further damage. February's gains have now been lost and we see further consolidation necessary before the NASDAQ is likely to make a substantial move to the upside.

This is a difficult market for breakouts to sustain lengthy gains. The best strategy is to take short term gains early and cut losses quickly. There were 40 breakouts this week with an average intraday gain of 6.2%. It is best to take that gain while it is on offer, rather than wait for the longer term gains that our expected gain model predicts, but may require considerable patience in this market. The best intraday gains this week were made by SIGM (16.4%), AMXC (15.24%), EP (14.45%). Looking back a couple of weeks, to February 1, I see that DHC has gained a mere 78%! So although the market is difficult, breakouts can still bring excellent rewards.

 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Market1
Signal
Dow 10785.2 -0.1% 0.02% enter
NASDAQ 2058.62 -0.87% -5.37% enter
S&P 500 1201.59 -0.31% -0.85% enter
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
Dow Jones
-0.1 %
Dow Jones
0.65 %
Dow Jones
4.02 %
Dow Jones
0.02 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Oil & Gas-Drilling Oil & Gas-Drilling Metal Prds-Distributors Oil & Gas-Drilling
 Most Improved Industry (by change in technical rank2)
Transportation-Air Frght
+ 73
Transportation-Air Frght
+ 78
Food-Candy
+ 87
Retail-Mail Order/Direct
+ 89
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 24.54 6.23% 2.71%
Last Week 30 24.46 8.33% 3.3%
13 Weeks 324 N/A 13.48%
3.47%
Sector
Industry
Breakout Count for Week
Electronics
Electr-Semicndtr Mfg
2
Healthcare
Healthcare-Biomed/Genetic
2
Real Estate/ REIT
Real Estate-REIT
2
Utility
Utility-Water
2
Banks
Banks-West/Southwest
1
Banks
Banks-Midwest
1
Building
Building-Residentl/Comml
1
Business Services
Business Svcs-Schools
1
Business Services
Business Svcs-Sec/Safety
1
Computer
Computer-Networking
1
Electronics
Electr-Semicndtr Equip
1
Electronics
Electr-Connectors/Components
1
Energy
Energy-Other Sources
1
Finance
Finance-Brokers
1
Food
Food-Meat Products
1
Internet
Internet-ISP/Content
1
Internet
Internet-E:Commerce
1
Leisure
Leisure-Products
1
Leisure
Leisure-Gaming
1
Leisure
Leisure-Htls/Mtls
1
Metal Prds
Metal Prds-Pipe/Fab/Misc
1
Oil & Gas
Oil & Gas-U S Integrated
1
Oil & Gas
Oil & Gas-Field Services
1
Oil & Gas
Oil & Gas-U S Explr/Prod
1
Oil & Gas
Oil & Gas-Intl Integrated
1
Personal
Personal-Shoes
1
Retail
Retail-Computers/Mobile
1
Retail
Retail-Restaurant
1
Retail
Retail-Supermarkets
1
Special
Special-ClsdEndFunds/Bond
1
Special
Special-Market/Tracking Funds
1
Steel
Steel -Producers
1
Telecomm
Telecomm-Wireless Services
1
Telecomm
Telecomm-Services Fgn
1
Transportation
Transportation-Services
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 GILTF Gilat Satellite Networks Ltd. 113
Top Technical EVST Everlast Worldwide Inc. 53
Top Fundamental SHFL Shuffle Master, Inc. 20
Top Tech. & Fund. STST ARGON ST, Inc. 22
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 ALDA Aldila, Inc. 61
Top Technical GAP Great Atlantic & Pacific Tea Company, Inc. (The) 38
Top Fundamental BFAM Bright Horizons Family Solutions Inc. 26
Top Tech. & Fund. GPRO Gen-Probe Incorporated 50
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.
 New Features this Week Additional Value that we added this week

The new Industry Analysis service continues in beta test status. Several enhancements were made this week based on subscribers suggestions to improve the flexibility of the industry charts and more work has still to be done.

A new watchlist ShortsaleWatch will debut this week. See the next section of the newsletter.

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

New Feature: ShortsaleWatch

In the next few days (maybe even by the time you read this) we will be releasing a new feature in beta test - a short sale watchlist - ShortsaleWatch

This will work similarly to our other watchlists in that an alert will be issued when a stock on the list breaks below a defined price point on heavy volume.

The watchlist will be compiled by selecting stocks that meet a specific set of criteria. These criteria are based on the guidelines offered in How to Make Money Selling Stocks Short by William O'Neil with Gil Morales, with additional requirements and constraints of my own.

The criteria for adding a stock to ShortsaleWatch will be:

ShortsaleWatch Criteria
Commentary
1. The stock must have closed at $15 or more.
We want stocks that are of interest to institutions because they have the power to significantly adversely affect the stock's price
2. The average daily volume must be at least 500,000
Stocks with greater liquidity are less likely to make sudden moves creating a short squeeze. (NB. O'Neil recommends at least 1 million shares - we go lower to allow some freedom of choice)
3. The stock must have closed at least 100% above the lowest point in its base in the last 36 months.
We want stocks that have made significant gains, and have a deep base to fall into to give a good return on the short sale
4. The technical strength of the stock must be deteriorating relative to the overall market strength
This is important because although the stock price may be falling, it might actually be outperforming the market otherwise. We want to find stocks that are weakening compared to the rest of the market.
5. The stock must be below its peak of the last 6 months and have begun to oscillate around its 50 day moving average. A minimum of two crosses to the downside of the 50 day moving average are required.
Failing stocks tend to use the 50 day moving average as a support/resistance line while under- and over-shooting it.
6. There must have been at least one day of heavy selling (at least 1.5 times average daily volume) since the stock peaked.
This indicates weakness and that the stock may about to become under heavy distribution.
7. The stock must have closed above its 50 day moving average in at least one of the last two sessions.
This requirement ensures that the stock may be about to break below the 50 dma, or may have just done so. A alert will be sent on either of these two days if the projected volume exceeds 1.5 times average daily volume.

A stock that was found by our algorithm and currently meets these criteria is GGC as of Friday, February 18. We see it has more than doubled in price in less than 2 years and appears to have made a climax top of $58.75 on 12/02/04. It immediately fell sharply on heavy volume to just below the 50 dma before recovery and then fell through it again. In fact the stock has crossed the 50 dma to the downside 3 times and has now recovered but turned downwards once again. A 4th cross to the downside on heavy volume would be a short sell signal.

Disclaimer: We are not recommending GGC as a suitable short sale. We are using it only as an illustration of how stocks will be selected for the ShortsaleWatch.


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