Weekly Newsletter 10/15/05
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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

The markets staged a mild recovery on Friday following the release of benign inflation data, improved retail sales figures and strong quarterly earnings from General Electric. The recovery was moderated, however, by a fall in the University of Michigan's consumer sentiment index to well below expectations. Friday's recovery, the second positive move in succession for the NASDAQ Composite, was insufficient to lift the indexes into positive territory for the week. The DJI slipped narrowly by 0.05% while the NASDAQ fell more steeply with a 1.22% loss and the S&P 500 gave up 0.78%.

Thursday's turnaround in the downward advance of the NASDAQ was a welcome relief, and it was reassuring to see the turnaround continue on Friday. The NASDAQ was at levels not seen since early July after falling through the 2050 resistance level we discussed last week, and a further fall to below 2000 looked possible. Two positive days don't mean that a recovery is in progress, however, and we must wait for a confirmation day before we can declare the recent slide to be checked. The requirements for a confirmation day were discussed in last weeks newsletter.

The number of confirmed breakouts fell to seventeen this week and most had difficulty keeping their head above water. Those that did make substantial gains, Monolithic Power Systems (MPWR ) and On-Line Reservation Corp. (ORCC) had both shown considerable strength while in their handles as they resisted the general downwards pressure to make positive price moves on above average volume. We have often indicated that this kind of price/volume action in the handle can herald a coming breakout.

Our ShortsaleWatch service confirmed 20 breakdowns this week of which six fell by more than 5%.

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 New Features this Week Additional Value that we added this week

Bollinger Band 'Bands'

We've added a new option to our Technical Analysis Charts that allows the display of Bollinger Bands for both 1 and 2 standard deviations from the 20 day moving average. The result is two Bollinger Bands that can be very useful in spotting trend reversals and generating sell alert signals. The new option is obtained by selecting 'BB Bands ' as a Price Band option in our Technical Analysis charts control panel.

Examples of the use of the new feature are given below.

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

Using Bollinger Band 'Bands' to Detect Trend Reversals and Sell Signals

We first discussed Bollinger Bands in our newsletter of 8/27/05 shortly after we introduced our Technical Analysis Charts (T/ACharts) service. Two of the points we emphasized was that a move outside the bands did not necessarily mean it was time to sell (or buy) and that stocks tend to walk-up (or walk-down) the bands. In view of this, how can Bollinger Bands help us with our sell decisions?

This week we added a new option, 'BB Bands' to our T/A Charts that goes some way towards answering that question. When you choose BB Bands as a Price Band option you will get a chart with Bollinger Bands drawn at the 1 standard deviation level as well as the normal 2 standard deviations. To illustrate how the BB Bands can serve to confirm trend changes, here's an example of Imperial Oil (IMO) the top ranked stock in the top ranked Oil and Gas Canadian group that has performed so well this year.

  • Trend A shows the stock tracking between the lower two bands with a possible change in trend signaled as it crosses the inner band to the upside. This is labeled 'Buy Alert'.
  • Trend B begins when the stock crosses out of the inner band to the outer band. This is labeled 'Buy Confirm'.
  • Trend B continues until the stock closes within the inner band for the first time. This is labeled 'Sell Alert'.
  • The stock now consolidates in area C. Notice that it never closes below the lower inner trend line but re-crosses the upper inner trend line at which point the sell alert is cancelled.
  • The stock now walks up the outer band until another Sell Alert is issued at the start of area E.
  • Another period of consolidation begins (E) and the Sell Alert is cancelled as the consolidation is completed and the stock moves out of the inner-band to the upside.
  • Trend F now begins as the stock again walks up the outer band. A brief Sell Alert is issued in late September which is cancelled the following day (not shown). Another Sell Alert is issued on October 4 and confirmed on October 5 as the stock closes below the lower inner band.

The strategy shown is a conservative one where a confirmation is required before the buy or sell alert is confirmed. A riskier strategy is to buy or sell on the initial alert but in that case it is desirable to have confirmation from other non-correlated indicators such as the RSI (or MACD) and On Balance Volume. (Note that the RSI and MACD should not be used together as they are both derived from closing price data alone). Using the BB Bands in conjunction with these indicators can help us determine when to sell a breakout that we might be holding. Here's an example of a recent breakout (9/16) that rose 53.5% in twelve sessions.

Following breakout the stock walked up the outer band but a sell signal was given on 10/5 when the stock closed within the inner band. This sell signal was confirmed on the same date as the RSI dropped below the overbought line and the On Balance Volume (OBV) was clearly in decline.

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 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Market1
Dow 10287.3 -0.05% -4.6% enter
NASDAQ 2064.83 -1.22% -5.08% exit
S&P 500 1186.57 -0.78% -2.09% enter
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
Dow Jones
-0.05 %
Dow Jones
-2.36 %
Dow Jones
-2.56 %
S&P 500
-2.09 %
 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 Oil & Gas-Cdn Integrated Oil & Gas-Cdn Integrated
 Most Improved Industry (by change in technical rank2)
Food-Dairy Products
+ 64
Food-Dairy Products
+ 72
+ 137
+ 130
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 17 28.85 -1.66% -4.62%
Last Week 34 32.31 3.11% -3.82%
13 Weeks 443 32.62 11.74%
Breakout Count for Week
Banks-Money Center
Computer Software
Comp Software-Financial
Diversified Operations
Diversified Operations
Electr-Semicndtr Mfg
Finance-Invest Management
Transportation -Airlines
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
Best Overall SRSL SRS LABS INC 64
Top Fundamental RJET Republic Airways Holdings Inc. 17
Top Tech. & Fund. RJET Republic Airways Holdings Inc. 17
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
Top Fundamental RJET Republic Airways Holdings Inc. 24
Top Tech. & Fund. RJET Republic Airways Holdings Inc. 24
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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