Weekly Newsletter 07/09/05
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Market Summary Weekly Breakout Report Top Breakout Choices Top 2nd Chances New Features Tip of the Week
Prior editions of this newsletter with our valuable Tips of the Week are available here.
 Weekly Commentary  

Market Summary

This was a turbulent week for the markets as they coped with rising and then falling oil prices and the terrorist attacks in London. After closing down on Wednesday on rising oil prices and falling further on Thursday morning, a rally began on Thursday afternoon which continued strongly on Friday. The DJI gained 1.41% for the week, the NASDAQ Composite gained 2.7% and the S&P 500, 1.46%. Our market model issued an exit signal on Wednesday as the NASDAQ suffered its 5th distribution day in 9 sessions, but it reversed itself on Friday as the NASDAQ gained 1.8% and broke through the 2100 resistance level. My readers will recall that we have been watching for a breakthrough at that level since the NASDAQ's recent rally stalled just below that level on June 2. The NASDAQ is now at its highest level since January 4th, but still down 2.9% for the year. The DJI is off 3.1% and the S&P 500 is at breakeven for the year. The gains in the last two days were particularly impressive considering the events in London. With strong earnings being reported in the last few days by retailers and Alcoa exceeding earnings expectations on Friday, it appears that the markets are poised to move higher if earnings continue to exceed expectations and oil prices do not throw another scare into the markets. The potential for the broad market indexes to move higher is demonstrated in the following charts.

With the breakthrough of the 2100 resistance level, the NASDAQ is set to test the high set on December 31, 2004 of 2191.

The S&P 500 has not yet broken out of the bearish head and shoulders pattern, but the gains of this week make it more likely that the neckline at 1220 will be penetrated.

There were 40 breakouts this week, exceeding the average of the last 13 weeks, which indicates the tendency of the markets to move higher. 12 of these gained more than 5% and 3 gained more than 10%. The strongest breakout of the week was Bottomline Technologies (EPAY) which gained 16.23% after its breakout on Wednesday on 5 times average volume. This breakout was presaged by three days of price gains on well above average volume. We have often commented that the strongest breakouts occur under these conditions and we have enhanced our 'Handle Quality' (HQ) metric to allow easier recognition of these conditions. See this week's Top Tip to learn how to pick outstanding breakouts.

The two strongest sectors produced over 25% of this weeks breakouts. The Healthcare sector continued to demonstrate strength with 8 breakouts, while the Oil and Gas sector produced 5 breakouts.

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 New Features this Week Additional Value that we added this week

The Handle Quality (HQ) metric was improved to allow easier recognition of stocks that are rising on increased volume and may breakout on the following day.

The Backtest feature was enhanced to allow selection of a time period for backtesting up to the last 65 (13 weeks) of trading. This is to allow fine tuning of filters against current market conditions.

See This Week's Top Tip for more details.

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

Using Handle Quality to Find Stronger Breakouts

We have previously shown (Newsletter, 4/23/05) that the strength of the breakout, as measured by the gain on breakout day, is influenced by the price and volume action on the day prior to the breakout. If the price moves up and the volume is greater than the day before, then the gain over the pivot on breakout day is around 17% better than the average breakout gain.

Until now our HQ metric evaluated a handle's properties based on the desirable behavior in the early days of the handle, when we want to see volume drying up as the price falls. It did not take account of the desirable behavior towards the end of the handle, when we want to see the handle start to turn up. This has now been corrected with the following modifications to the HQ formula:

  • if the latest close is higher than the previous close and the latest volume is equal to or greater than the average volume then add 1 to the HQ score.
  • if the latest close is higher than the previous close and the latest volume is equal to or greater than the previous day's volume then add 0.5 to the HQ score.

To take advantage of this enhanced HQ metric, you will need to adjust your HQ filter value. For example, to be to sure to be alerted to stocks that are breaking out when the price rose on the previous day and the volume was greater than average, then set the HQ filter to be => 1. When combined with other filters, this can be used to select very powerful breakouts, as the following example shows:

The example above also shows the enhancement made to our backtest feature, which now allows you to backtest over any number of trading days up to a maximum of 65 (13 weeks). This is to allow you to optimize your filters for current market conditions.

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 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Market1
Signal
Dow 10449.1 1.41% -3.1% enter
NASDAQ 2112.88 2.7% -2.88% enter
S&P 500 1211.86 1.46% -0% enter
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
NASDAQ Composite
2.7 %
NASDAQ Composite
3.31 %
NASDAQ Composite
2.12 %
S&P 500
-0 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Oil & Gas-Cdn Integrated Oil & Gas-Cdn Integrated Healthcare-Hospitals Oil & Gas-Drilling
 Most Improved Industry (by change in technical rank2)
Electr-Laser Systems
+ 43
Transportation-Equip Mfg
+ 41
Building-Painting Prds
+ 85
Oil & Gas-Intl Explr/Prod
+ 126
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 32.92 4.77% 2.85%
Last Week 39 31.69 6.53% 3.89%
13 Weeks 464 34.62 12.51%
8.23%
Sector
Industry
Breakout Count for Week
Computer Software
Comp Software-Enterprise
2
Healthcare
Healthcare-Biomed/Genetic
2
Healthcare
Healthcare-Instruments
2
Real Estate/ REIT
Real Estate-REIT
2
Retail
Retail-Apparel
2
Textile
Textile-Apparel Mfg
2
Auto & Truck
Auto & Truck-OEM
1
Banks
Banks-Southeast
1
Banks
Banks-Foreign
1
Banks
Banks-Money Center
1
Building
Building-Heavy Constr
1
Building
Building-Residentl/Comml
1
Business Services
Business Svcs-Misc
1
Computer Software
Comp Software-Financial
1
Computer Software
Comp Software-Educ/Enter
1
Electronics
Electr-Misc Products
1
Finance
Finance-Brokers
1
Healthcare
Healthcare-Products
1
Healthcare
Healthcare-Drugs/Ethical
1
Healthcare
Healthcare-Wholesale/Distrb
1
Healthcare
Healthcare-HMO
1
Leisure
Leisure-Services
1
Leisure
Leisure-Toys/Games
1
Leisure
Leisure-Gaming
1
Metal Prds
Metal Prds-Pipe/Fab/Misc
1
Oil & Gas
Oil & Gas-Drilling
1
Oil & Gas
Oil & Gas-Mach/Equip
1
Oil & Gas
Oil & Gas-Field Services
1
Oil & Gas
Oil & Gas-U S Integrated
1
Oil & Gas
Oil & Gas-Prod/Pipeline
1
Retail
Retail-Auto Parts
1
Special
Special-Market/Tracking Funds
1
Telecomm
Telecomm-Equipment
1
Telecomm
Telecomm-Services Fgn
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 AHCI Allied Healthcare Intl. 122
Top Technical TALK TALK AMERICA HLDGS INC 87
Top Fundamental SPN SUPERIOR ENERGY SVCS INC 56
Top Tech. & Fund. SPN SUPERIOR ENERGY SVCS INC 56
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 CGPI COLLAGENEX PHARMACEUTCLS INC 93
Top Technical CIB BANCOLOMBIA S A 71
Top Fundamental ISRG INTUITIVE SURGICAL INC 41
Top Tech. & Fund. ISRG INTUITIVE SURGICAL INC 41
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.

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