Weekly Newsletter 04/23/05
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Market Summary Weekly Breakout Report Top Breakout Choices Top 2nd Chances New Features Tip of the Week
 Weekly Commentary  

Market Summary

The markets recovered from their lows of the year this week to close higher for the week. The DJI gained 0.7%, the NASDAQ Composite, 1.26% and the S&P 500, 0.83%. After a strong distribution day on Wednesday, the markets recovered on Thursday, but on lighter volume, and then succumbed to profit taking on Friday. The bright spot in Friday's trading was that the markets rallied strongly in the last 30 minutes to close above their lows of the day.

A glance at our equivolume chart of the DJI shows that this index is still under distribution. The width of the bars is proportional to the average daily volume and it is clear that the red bars are consistently wider than the blue ones. There have been 6 distribution days, but only 2 accumulation days in the last 20 sessions. The DJI tested the psychological 10,000 barrier on Wednesday and recovered from it. If there is a further test of 10,000 and the index does not find support at that level, then the next support level is 300 points lower at 9700.

The NASDAQ Composite is of most interest to CANTATA investors as that is where the new leaders (the 'N' in CANTATA) usually appear from. The NASDAQ marked its low of the year on Monday but recovered to close higher on the day. That set the clock running for a confirmation of the rebound during the next 4 to 10 sessions using our market model which is described here. As you can see from the following chart, Wednesday's distribution day did not undercut Monday's low, so the clock kept running. Thursday was day 4 of the count but volume was lower than Wednesday so it did not count as an accumulation day. Consequently, despite the huge 2.5% gain, the model did not change from 'exit' to 'enter'. On Friday the clock continued to run as Monday's low was still not undercut.


The number of confirmed breakouts fell again this week to 21, less than the 13 week average of 25.5. We also see that while breakouts are performing quite well for a few days, they are not maintaining their gains and slipping back to follow the overall market trend downwards. This suggests that a day-trading or swing-trading style is most profitable at the moment. Some examples of this from this week were ASPM that rose 8% above its pivot to fall back to a 2.5% gain, GME that gained 8.8% before slipping back to just 0.1% over its pivot and UTHR which gained 7.75% before slipping back to a 5.2% gain. ASPM and GME shared a common characteristic of stocks that make big breakouts, as shown in the chart of GME below. We discuss this in more detail in today's top tip.


Despite Wednesday's big selloff, there were just 5 confirmed breakdowns this week. We issued a breakdown alert on PPC on Monday from ShortsaleWatch which fell 7.5% by week's end. The overall average loss of breakdowns since we started the alerts service on March 1, is 7.9%. Subscribers are reminded that to receive breakdown alerts, they need to request them on the Account Management > Update Account page.

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 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Market1
Dow 10157.7 0.7% -5.8% enter
NASDAQ 1932.19 1.26% -11.18% exit
S&P 500 1152.12 0.83% -4.93% enter
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
NASDAQ Composite
1.26 %
S&P 500
-2.46 %
S&P 500
-1.89 %
S&P 500
-4.93 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Healthcare-Hospitals Oil & Gas-Drilling Oil & Gas-Drilling Oil & Gas-Drilling
 Most Improved Industry (by change in technical rank2)
+ 34
Food-Meat Products
+ 52
Electr-Scientific Instruments
+ 89
+ 110
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 21 24.54 3.73% 0.29%
Last Week 24 24.23 1.6% -6.96%
13 Weeks 357 25.54 11.86%
Breakout Count for Week
Aerospace & Defense
Aerospace & Defense-Equip
Business Services
Business Svcs-Misc
Computer Software
Comp Software-Desktop
Diversified Operations
Diversified Operations
Electr-Semicndtr Equip
Finance-Misc Services
Oil & Gas
Oil & Gas-Field Services
Retail-Consumer Electr
Textile-Apparel Mfg
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
Company Name
Expected Gain1
Top Fundamental BHBC 19
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
Company Name
Expected Gain1
Best Overall NR NEWPARK RES INC 25
Top Fundamental CW CURTISS WRIGHT CORP -15
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.
 New Features this Week Additional Value that we added this week

A download facility was added to our Database Search service. This allows you to download the search results to Excel or any other software that accepts comma separated values (.csv) files.

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

Watch Handle Action for Signs of a Strong Breakout to Come

ASPM broke out of a cup-with-handle on Thursday, 4/21/05, on very strong volume and gained 8% over its pivot, (12% above its open) before it closed at 5.6% above the breakout price after profit taking. The price/volume action in the handle was typical of what we often see before a strong breakout as we also observed with GME this week (see above). Before we look at the chart of ASPM lets review the characteristics of a well formed handle.

  1. There should be a price pullback on moderately high volume after the pivot is set. This occurs because weak holders are taking profits.
  2. The pull back volume should be less than the volume on the day the pivot was set
  3. The volume should dry up as all weak holders close out their positions
  4. As the volume dries up, the daily trading range should tighten as the price stabilizes.

These characteristics are all measured by our Handle Quality (HQ) metric where values above zero are acceptable, with the higher the score, the better.

ASPM displays an additional characteristic that is frequently prevalent in strong breakouts but not measured in our HQ metric - the price rises on increased volume on the day before the breakout. An analysis of all breakouts since the start of the year shows that the average gain on breakout day when this condition is present is 17.3% higher than when the price does not rise on increased volume on the day before breakout. This is a very important result if you intend to trade breakouts in the short term, rather than hold for the medium term.

Here's the chart for ASPM:

There are many other examples I could show since the start of the year. There were 173 breakouts with a positive HQ score, of which 73 showed a price upturn on increased volume on the day before breakout. The average gain over their pivot on the breakout day for the 173 stocks was 2.77% while the average gain for the 73 was 3.25%, a 17.3% improvement.

Here are some examples of other high gainers on the breakout day.

DHC closed 15% above its pivot on 02/01/05 and went on to gain 60% in three days and 99% by April 6.

EVST closed 11.7% above its pivot on 2/23/05 and went on to gain 58% in 9 sessions.

MHR closed 10.7% above its pivot on 1/26/05 and went on to gain 30% on March 8.

TIE closed 10.4% above its pivot on 1/28/05 and went on to gain 54% on March 1.


A price upswing on increased volume in the handle does not mean that the stock will breakout in the next session.


A price upswing on increased volume is a signal that the breakout will be significantly stronger than average if the stock breaks out. You can find these stocks on our CwHWatch list by using the ChartBrowser and watching for a blue volume line on the current trading day.

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