Market Summary

The major indexes gained ground this week with large cap stocks benefiting most from falling crude oil prices, a positive economic outlook from the new Fed Chairman and renewed hope that although at least one further interest rate increase was likely, the tighter money policy might soon be relaxed. A few clouds darkened the horizon on Friday as crude prices rose, there was evidence of increasing inflation at the wholesale level, and consumer confidence slipped. For the week the DJI jumped 1.8%, the NASDQ Composite rose 0.91% and the S&P 500 gained 1.6%. The Dow is now the best performing index year-to-date, followed by the NASDAQ and then the S&P 500.

The NASDAQ began to turnaround on Tuesday and there was hope of a follow through day on Friday which would have flipped our market model signal to 'enter'. Alas, a disappointing profit forecast from Dell, along with the other macroeconomic factors cited above, held the index back and the signal remained at 'exit. Nevertheless, as can be seen from the chart below, the index has overcome resistance at the 50 day moving average level, the On Balance Volume trend, which is an indicator of institutional interest has turned up and the Parabolic Stop and Reverse indicator changed direction on Thursday from sell to buy. However, since the index is trending sideways, the PSAR is not a reliable indicator of direction.

The number of breakouts remains well below average with just twenty-seven last week for an average gain by week's end of 1.85%. Just four stocks closed out-of-range (that is, at more than 5% over their breakout price) with the top performer being Raven Industries (RAVN) which closed the week 10.75% above its breakout price.

Our top performing industry continued to be Machinery-Construction/Mining with Retail-Discount/Variety being the most improved.

Improved Sell Assistant

We are pleased to be able to introduce an improved version of our Sell Assistant that substantially increases backtested returns from our TradeWatch Best Returns list. All future sell alerts sent from the site will use the new model. This improved version should also improve returns on any stock that was on an upward trend at time of purchase. This includes all breakouts from CwHwatch, FBwatch and DBwatch.

The new model improves the average returns on an individual stock by 30.8% and the non-compounded annualized return by 29.4% (using data as of 2/16/06).

The improvements to the model were achieved in two ways:

1. Taking profits when the stock shows signs of weakness after gaining at least 25%.
2. Cutting losses when the stock gaps down and closes below its 50 day moving average.
3. We use On Balance Volume (OBV) in addition to the Price Volume Oscillator (PVO) to allow winners to run.

Example of taking profits

Under the old model, we took a loss on GGR after it gained 55% and then plummeted.

Under the new model we sell as the stock turns down after crossing into the inner Bollinger Band and turn a potential loss into a 31% profit.

Example of Cutting Losses

Our old model allowed EPAY to drop over 15% below the buy price before the PVO confirmed a sell signal.

The now model sells EPAY as it gaps down below the 50 day moving average for a loss of just 3.3%.

Example of allowing profits to run

Our old sell model sold SIRF for a 'mere' 44% gain after it crossed two Bollinger Bands and the PVO turned positive.

However, the OBV trend was still positive and our new model waits until both the OBV and PVO confirm the sell signal. This allows the stock to gain 93% before a sell signal is generated.

The new model is now operational on the site and is used by the Sell Assistant. The TradeWatch Best Return history has been updated to reflect the Sell Signals. The old version has been archived here.

Market Signals Update

Last week we presented figures showing the returns that would have been obtained from using our NASDAQ market signal to trade in QQQQ. Some subscribers questioned as to why the annual returns for QQQQ using our market signals to buy, sell, short or cover did not add up to the overall return for the five year period 2000 - 2005. The reason was that the individual yearly returns only included trades opened and closed during the year. Consequently, trades that straddled a year were not included. Here are the yearly returns for trading both long and short positions assuming you opened a position at the start of the year based on the signal in effect at that time and closing the position at the end of the year.

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.