Market Summary

While a number of factors created turbulence and divergence in the markets this week, the dominant story was falling oil prices leading to reduced inflation fears which helped the large cap dominated DJI and S&P 500 to make gains this week while the NASDAQ, unnerved by Google and Yahoo failing to meet earnings expectations, slipped again. The DJI gained 1.16%, the S&P 500 added 0.23% while the NASDAQ closed slightly lower with a loss of 0.03%.

The NASDAQ dipped below its 50 day moving average a week ago and that level has provided resistance all week despite a strong attempt to break above it on Thursday. Over the last two months, the index dipped below the 50 dma briefly and then recovered (see chart below). It may still do so this time but trading volume has increased and the index appears to be under more selling pressure this time. Note that the index has also broken through the ascending support line. Our market signal for the NASDAQ remains at exit. You can see how our NASADQ market signals have performed against against various ETF's in a new tool we are providing to all newsletter readers today. See this week's Top Tip below.

As the market weakens, the number of breakouts falls and the performance of those breakouts slips also as is shown in our summary of breakout performance below. That is why using our market signals to limit your trading can conserve your capital in times of market weakness.

Using Market Signals for ETF Trading

Our market signals were developed to provide a rigorous approach to identifying when to be invested in the markets and when to stay in cash. You can read about our approach here. The enter and exit signals generated by the model were not intended to be used to provide signals for trading market indexes, but rather simply as a guide to when there was greater or lesser risk in investing in breakouts.

However, a subscriber has asked if the NASDAQ signal could be used for trading QQQQ or other similar tracking funds. To provide an answer I have developed a tool that shows the theoretical returns that could be obtained if the market signals had been used over the last 5 years. The tool allows you to simulate trades based on the market signals for any time period since 01/01/05 up to the latest available data using either a long only strategy or both long and short. The returns are quite striking! For example, between 01/01/00 and 12/31/05, QQQQ's lost 58%. If the market signals had been used to trade QQQQ's both short and long, the total return from all trades would have been 167%, beating the index by 325%! If the returns on each trade had been reinvested in the next trade, the return would have been 225%, beating the index by 383%.

Using a long only strategy the total return from all trades would have been 23.75% .

Using the tool to get annual returns for QQQQ since 2000 gives the following results.

You are welcome to use the tool to test the market signals against a number of ETF's including QQQQ, SPY, DIA and so on. The link to the tool is http://www.breakoutwatch.com/marketIndexes/signalReturnsETF.php

Please post questions and comments to the Breakoutwatch Forum.