|Weekly Newsletter 12/03/05|
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A week or so ago, the markets were encouraged by what they saw as indications that an end to rising interest rates was in sight. This week, however, strong GDP growth and improving consumer sentiment brought that assumption into question and the markets began the week with three days of losses. The markets breathed a sigh of relief and rallied strongly on Thursday with news of a lower than expected growth in the core CPI. Interest rate fears returned on Friday though, with better than expected employment data providing more evidence of a robust economy. The result of this turbulence was a mixed week for the markets with large cap stocks suffering a mild setback. The DJI and S&P 500 both closed lower for the first time in six weeks with the DJI losing 0.35% and the S&P 500 0.04%. The NASDAQ Composite extended its gains for the seventh straight week with a gain of 0.59% on above average weekly volume.
The NASDAQ is the market of most interest to CANTATA investors because most new companies (part of the 'N' in CANTATA) trade there. It is now the best performing index year-to-date with a gain of 4.5%. Now that the index has cleared all resistance levels set this year it's time to take a longer term view of the chart.
We see that the index was in a rising wedge pattern which is considered bearish. However, the index cleared the upper resistance side of the wedge last week and that resistance line now becomes support. This support level was tested on Tuesday and held as the index recovered to a new high by week's end. This breakthrough, test and recovery is a bullish signal for the NASDAQ market.
The number of successful breakouts almost doubled this week to 56. Among the strongest breakouts for the week were Ez Em Inc. (EZEM) which rose 18.4% over its pivot before closing for a 13.4% gain and GeoGlobal Resources (GGR) which closed the week at its high of 13.65% above its pivot point.
Please read on for news of a sell strategy that we are introducing today and will be expanding in the coming weeks.
We are looking for a suitable name for the tentatively named 'Breakoutwatch for Traders' page. This will be a premium service when launched in January but we will give a one-month subscription to it for the best suggestion received by Friday, December 16. Send your proposal to email@example.com.
|New Features this Week||Additional Value that we added this week|
The T/A charts linked to the Breakoutwatch for Traders history page were enhanced to include sell signals. See below.
|This Week's Top Tip||Tips for getting the most out of our site|
Today we release a new feature that completes the stock trading life-cycle - Sell Signals. These are being introduced as part of the new BreakoutWatch for Traders service which is on beta test until January. Initially, the sell signals will be shown graphically on charts accessible from the 'View History' buttons on the main page. You can start looking at and using these signals now for stocks that have appeared on the Breakoutwatch for Traders lists by clicking on the stock symbol in the history list. Next week we will introduce a sell alert service based on the closing price of stocks on the 'Best Return' and 'Swing Trade' lists.
Sell signals are generated by an algorithm we have developed over the past several months and can include stop-loss criteria you specify (the default is 8%). Sell signals are generated based on the closing price and where a historical Gain/Loss is calculated, the opening price on the day following the signal is used. Here's an example of a breakout that would have given a great return using the sell model:
The annotation on the chart shows the theoretical best return possible and the return that would have been given by our sell model. Of a theoretical maximum gain of 195%, the sell model captured a 172% gain. The chart shows Bollinger Bands, Parabolic SAR and On Balance Volume because these are components of the sell algorithm. We will return to these later, but an understanding of them is not necessary to use the sell model.
The model doesn't always produce such outstanding results, as the next one shows. Of a theoretical 70% gain, only half that was actually achieved.
The sell model also keeps track of stop loss settings you may wish to enter and will indicate a sell stop as follows. In this case, an 8% stop loss cost a potential gain of 100%:
If you had relied on our sell model instead of an automatic stop loss, you would have turned an 11% loss into a 73% gain, as follows:
We will analyze the performance of the sell model using no hard stop loss further in next week's newsletter article and present supporting data. For now, I can say that the average return from the model this year was 15% compared to a theoretical maximum return, as shown on the Best Return History view of 33%. That may seem disappointing, but I believe it would be very difficult to do as well by any other method, given that one will almost always sell too soon or too late. Moreover, if taking profits at 20-25% I believe you would have done considerably worse on average because the biggest gains would have been missed.
Sell Model Methodology
The sell methodology relies on three metrics: Bollinger Band Bands, Parabolic Stop and Reverse and the trend of the On Balance Volume (OBV) indicator. We introduced Bollinger Band Bands in our Newsletter of October 15 and added the Parabolic Stop and Reverse (PSAR) two weeks ago. The sell model firstly looks at the relationship of a stock's closing price to the 1 standard deviation and 2 standard deviation Boliinger Bands. If the stock has crossed 2 bands, say from outside the 2 standard deviation band to inside the 1 standard deviation band, then we have a potential sell situation. We look for confirmation to the PSAR and the On Balance Volume trend. The signal is confirmed if the PSAR signals a reverse and the OBV trend is negative. A close-up of the days surrounding the sell signal for NURO illustrates the mechanism.
This methodology is based entirely on our own original research. We found that the BB Bands and PSAR indicators alone or in combination gave exit signals that were too early and many strong gains were missed. We looked at other non-correlated indicators such as the RSI for confirmation but found using the OBV Trend gave the best results. The OBV trend is obtained by smoothing the OBV line and taking the first differential. It is not available as a separate indicator, although the OBV itself, is.
We welcome any questions, comments and suggestions for improvements and/or alternative strategies through the Breakoutwatch Forum.
Accessing the Sell Model
The model is incorporated automatically into all charts generated from the Breakoutwatch for Traders 'View History' pages. You will see that there is an optional entry field for a stop loss. The default is 8%. To use no stop loss enter 99.
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. If you’re interested in speaking to a representative, simply call them toll-free at 1-800-308-3938 or e-mail firstname.lastname@example.org.
|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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