Weekly Newsletter 11/12/05
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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 closed higher for the fourth straight week with gains of 1.47% for the DJI, 1.52% for the NASDAQ and 1.19% for the S&P 500. The NASDAQ is now the best performing index over the last 26 weeks and is approaching resistance levels formed by the high at the beginning of August and the steeply upward sloping trend line of recent highs which intersect around 2220. Over the last week it has continued to track the upper Bollinger Band and all indications are that the underlying sentiment in the market is that an end-of-year rally is likely. Although the terrorist attack in Jordan gave the markets brief pause, this sentiment was helped by falling oil prices, and strong overseas demand for 10 year Treasuries at this week's auction showing confidence in the US economy.

The number of breakouts and their subsequent performance is another indicator of the prevailing bullish attitude. The number of breakouts rose to forty this week against a recent average of 25. The average return for the week, including Friday's breakouts, was 3.92%, comfortably more than doubling the rise in the indexes. The average gain over the last two weeks is a very satisfying 8.7%. Helping to raise that average is PW Eagle (PWEI) which has risen 73% since its November 3 breakout. Among this week's big gainers were Air Methods (AIRM) which closed the week 17.5% above its breakout price, Aleris International (ARS) which also closed 17.5% higher and LMI Aerospace (LMIA) which closed 15.1% higher.

Special Offers

Silver and Gold subscribers will be automatically upgraded to Platinum status between now and Monday, November 19, to allow them to evaluate our new metrics and the filter strategy detailed in today's Top Tip.

Guests will be given full Platinum privileges over Thanksgiving weekend from November 24 to 27. This is a great opportunity for newsletter subscribers who are not yet full subscribers to take advantage of our very rich tool set.

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 New Features this Week Additional Value that we added this week

There were no new features this week, although minor improvements were made to the T/A charts to improve the presentation of annotations.

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

Using New Metrics to Significantly Improve Returns

Over the last three weeks we have introduced three new metrics that improve the chances of selecting successful breakout candidates and of improving the return after breakout. This week we look at how to combine these new indicators to develop filters that:

  • improves the chances of selecting a successful breakout by a factor of four
  • reduces the number of failed breakouts by a third, and
  • increases the potential return by a third.

We also present a strategy to place broker orders prior to market open for those subscribers who cannot trade during market hours.

We are indebted to subscriber DavidC for his statistical expertise in developing these filter values and the order strategy. Our goal was to find filters that would suit three different trading styles: conventional medium term buy/hold, swing trade and day trade. This week we focus on conventional medium term buy/hold where the goal is to buy breakouts that will make gains of 25% or more over several weeks or months.

Filters for Maximum Medium Term Gain

We recommend you clear your existing CwH filters and use the following set as a starting point for developing new ones.

RS >= 84; RCQ >= 0.5; PVI >= 0.6; VADVR >= 1.1; HQ >= 0.3

Benefit 1: improved chance of selecting successful breakouts

These filters will improve your chance of selecting a stock that will breakout from our CwH watchlist by a factor of four!

Since the beginning of 2005, there were 45570 entries on our CwH watchlists. Of these, 1091 (2.4%) were confirmed breakouts on the next day.

Applying the recommended filters yielded 1025 selections of which 108 (10.5%) were confirmed breakouts on the next day. If you used these filters to limit your email alerts, you would have received 221 alerts yielding a 48.8% breakout success rate. When combined with an appropriate money management strategy (see The 8% Stop/Loss Rule) this will provide excellent returns.

Benefit 2: reduce the number of failed breakouts

The usual convention is that you shouldn't chase a breakout that has risen more than 5% above its pivot point. For that reason, we define a successful breakout as one that has risen by at least 5%. The convention is also that you should sell when the stock falls to 7-8% below your buy price. For that reason, we define a failure as a confirmed breakout that falls to -8% or more before having gained at least 5%.

Of the 1091 confirmed breakouts this year, 154 (14.1%) failed by this definition. Of the 108 breakouts that met the filters, 13 (12%) failed by this definition. We will see in a moment how we can reduce this failure rate further.

Benefit 3: increase return on investment (ROI)

Of all confirmed breakouts that did not fail according to the above definition, the average ROI until the day of the highest close was 21.7% after allowing for the 154 failures . For our filtered the group, the average ROI was 34.4%. That's an improvement of 28%!

A note about the results. From January until May the market was in steep decline. The results quoted above are for the year to date and would have been much better if we had used the period from May until now or better still from May to August. We chose not to do so because we think the statistics for the year as a whole are sufficiently impressive without needing to cherry-pick them. If the hoped-for holiday season rally materializes then better returns can be expected in the next few weeks.

Suggested Buy Strategy

Many of us are not able to monitor the market continuously and act immediately on an alert to obtain the best entry price. Those in that category must either place an order with their broker prior to market open, or buy confirmed breakouts at the end of the day at a less advantageous price. For those people we offer the following strategy that will maximize the number of successful breakouts, minimize the number of failures and maximize their ROI.

  1. Study our CwH watchlist prior to the market open using the filters suggested. Often there will be very few to no stocks selected. That's OK and to be expected because we are searching for a relatively rare set of characteristics that substantially improve our overall success.
  2. Use the ChartBrowser and our other tools to perform your own due diligence on the selected stocks and consider the market analysis contained in our daily market report.
  3. Place a buy stop/limit order with your broker at the breakout price + 2.5% with a limit at a further 10c above that. For example, if the BoP is $17.50, The buy stop will be $17.94 ( +2.5%) and the limit $18.04 (+ 10c). It may seem counter-intuitive to place the buy stop above the breakout price, but our analysis shows that stocks that break through that level have the best chance of going on to make the best gains with the least chance of failure.
  4. Sell the non-breakouts at the open the next day (average 4% loss).

If you had adopted this strategy during 2005, your theoretical maximum results would have been:

Number of buys: 58
No. of Confirmed Breakouts: 41 (70.7%)
Number of Failures: 2 (4.9%)
ROI after failures and losses from non-breakouts: 33.7%

A note about selling: The gains here are purely theoretical on the assumption that you would hold onto the stock and sell it at its peak closing price after breakout. In practice this is unlikely and you would either sell too soon or too late. Nevertheless, they show that the suggested filters can improve your returns. We are actively working on a sell strategy to combine with the approaches described above and hope to be able to announce something shortly.

A note about Fundamentals: Despite all the analysis we have done, we have not found any of our fundamental metrics to be of any statistically significant value in selecting successful breakouts or in performance after breakout. This may be surprising but I believe the explanation is that we are pre-selecting for our watchlists stocks that have a minimum RS of 70. this means that the market has already recognized the value in these stocks by ranking their price performance in the top 30% of all stocks. That ranking is presumably based heavily on the underlying fundamentals of the stocks so that once an entry point is presented in the chart pattern, it is the technical factors that have the most influence on the short to medium term progress.

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
• On-going communication, guidance, and consultation
• An environment that working together with their clients will help them reach their financial goals

You can learn more about TradeRight Securities at: www.traderightsecurities.com. If you’re interested in speaking to a representative, simply call them toll-free at 1-800-308-3938 or e-mail gdragel@traderightsecurities.com.

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 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Market1
Dow 10686 1.47% -0.9% enter
NASDAQ 2202.47 1.52% 1.24% enter
S&P 500 1234.72 1.19% 1.88% enter
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
NASDAQ Composite
1.52 %
NASDAQ Composite
3.88 %
NASDAQ Composite
6.38 %
S&P 500
1.88 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Machinery-Const/Mining Machinery-Const/Mining Oil & Gas-Cdn Integrated Oil & Gas-Cdn Integrated
 Most Improved Industry (by change in technical rank2)
Real Estate Development
+ 51
Electr-Scientific Instruments
+ 109
Electr-Scientific Instruments
+ 146
Electr-Laser Systems
+ 155
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 41 25.38 5.75% 3.84%
Last Week 38 24.15 11.29% 8.71%
13 Weeks 398 27.23 10.58%
Breakout Count for Week
Real Estate/ REIT
Real Estate-REIT
Diversified Operations
Diversified Operations
Finance-Invest Management
Metal Prds
Metal Prds-Pipe/Fab/Misc
Aerospace & Defense
Aerospace & Defense-Equip
Aerospace & Defense
Aerospace & Defense-Electr
Building-Heavy Constr
Computer-Integrated Sys
Computer Software
Comp Software-Educ/Enter
Computer Software
Comp Software-Security
Electr-Semicndtr Equip
Electr-Misc Products
Food-Dairy Products
Healthcare-Med/Dent Services
Healthcare-Nursing Homes
Machinery-Matl Hdlg/Autom
Retail-Consumer Electr
Telecomm-Wireless Services
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 Technical IIJI Internet Initiative Japan Inc. 79
Top Tech. & Fund. ASPM ASPECT MED SYS INC 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
Top Fundamental WBSN WEBSENSE INC 18
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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