|Weekly Newsletter 09/23/05|
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The markets continued to retreat this week as they reacted to threats to oil production facilities from Hurricane Rita and digested the comments of the Federal Reserve's Open Markets Committee which met on Tuesday. Hurricane Rita represents a short term threat that will be absorbed quite quickly and by Friday the markets had already started to recover as they reassessed the potential for damage and destruction as the hurricane weakened and shifted course. The markets were initially disheartened in reaction to the FOMC's statements, however. Hoping for a sign that interest rate hikes would soon end, investors were disappointed to hear that inflation is now just 'controlled' rather than the 'well controlled' of previous statements. There was brighter news though in the statement that the economy was resilient enough to recover quite quickly from the impact of Hurricane Katrina, and the market started to recover on Thursday. For the week, the indexes all closed down with the DJI losing 2.1%, the NASDAQ Composite 2% and the S&P 500, 1.8% and volume was above average giving the second straight week of distribution.
Last week we drew attention to the bearish double-top patterns of the NASDAQ and S&P 500 and for the potential for those bearish patterns to be confirmed, at least for the NASDAQ this week. We also posited a reversal of our market signal for the NASDAQ. Alas, these dire predictions came true on Wednesday as our market model signaled an exit for the NASDAQ and also confirmed the double top pattern. That confirmation line, at 2112 now becomes resistance as the index tried to recover. It closed at 2117 on Friday and we will see if that level or higher can be sustained on Monday. If so, it will be an indication that the index may be able to move higher.
The number of breakouts was surprisingly high at forty-four this week, being above the 13 week average of thirty-two. The gains for the week were negative overall however, in line with the market trend. Friday was an excellent day with nine breakouts confirmed out of ten attempts. TOMO (TOM Online Inc.) was the standout performer with a breakout on Wednesday on three times average volume which has continued on even stronger volume since to gain 13.4% above its breakout price at week's end. Other strong performers were ZIGO (ZYGO Corp), CP Canadian Pacific Railway), GPN (Global Payments Inc) and KONG (Kongzhong Corp). The Building sector produced the most breakouts (5) as investors sought to profit from the windfall to this industry provided by rebuilding from hurricane damage.
Please note that there will be no newsletter published next week as Mike Gibbons will be travelling.
|New Features this Week||Additional Value that we added this week|
There were no new features added this week.
|This Week's Top Tip||Tips for getting the most out of our site|
It is received wisdom among CANTATA investors that one should sell stocks immediately the stock falls to 7-8% below the purchase price. It is also received wisdom that one can expect a CANTATA stock to rise 20% after breakout before taking a profit, so lets look at why the 8% stop-loss rule works.
Suppose we have $100,000 invested in 8 stocks at equal weighting.
Now suppose that half of them rise by an everage of 20% at which point we sell and take a profit giving us $60,000.
Suppose also that the other half fail and we sell them each for an 8% loss giving us $46,000. At the end of the exercise we have $106,000 giving us an overall profit of 6%.
The point being that we only need to be right half the time in order to make a profit. Even if we were wrong 5 times out of 8, we would still have a meager profit of 2.5%.
So this simplistic rule allows us to make a profit and conserve our capital when our selections are mediocre or the market moves against us.
A more sophisticated approach would be to sell when support is breached, if it is above the 8% loss level. For a discussion of support and how to use it to improve the risk/reward ratio when initially purchasing breakouts, see this newsletter article.
Investment Advisors Using our Service
If you are interested in basing part of your investment strategy on our service, but do not have the time, experience or confidence to do so on your own account, then consider using an investment advisor.
TradeRight Securities, located in a suburb of Chicago, is a full services investment management company and broker/dealer. They have been a subscriber, and user, of BreakoutWatch.com for some time now. They practice CANTATA and use Breakoutwatch.com as a “research analyst”.
They also provide:
• A hands-on approach through personalized service
You can learn more about TradeRight Securities at: www.traderightsecurities.com.
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|Market Summary||Overview of market direction and industry rotation|
|Weekly Breakout Report||How confirmed breakouts performed this week|
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|
|Top Second Chances||Stocks that broke out this week and are still in buyable range|
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