Weekly Newsletter 02/18/06
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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 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.

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 New Features this Week Additional Value that we added this week

There were no new features added this week.


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

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).

Sell Model Version 1 Sell Model Version 2
No. of Positions Closed: 74
Avg. % Gain on Closed Positions: 7.2
Avg. Hold Period: 51 days
Annualized Return: 51%
No. of Positions Closed: 73
Avg. % Gain on Closed Positions: 9.42
Avg. Hold Period: 51 days
Annualized Return: 66%

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.

QQQQ Gain %
Market Signal
Long & Short Gain %
* Signal was 'exit' for entire 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.

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 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Market1
Dow 11115.3 1.8% 3.71% enter
NASDAQ 2282.36 0.91% 3.49% exit
S&P 500 1287.24 1.6% 3.12% enter
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
Dow Jones
1.8 %
Dow Jones
2.94 %
Dow Jones
3.99 %
Dow Jones
3.71 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Machinery-Const/Mining Machinery-Const/Mining Machinery-Const/Mining Machinery-Const/Mining
 Most Improved Industry (by change in technical rank2)
+ 43
+ 55
+ 115
+ 169
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 27 37.54 4.29% 1.85%
Last Week 45 38.31 5.09% 0.4%
13 Weeks 557 40.23 14.58%
Breakout Count for Week
Business Services
Business Svcs-Misc
Computer Software
Comp Software-Enterprise
Electr-Semicndtr Equip
Aerospace & Defense
Aerospace & Defense-Equip
Diversified Operations
Diversified Operations
Electr-Misc Products
Finance-Invest Management
Healthcare-Med/Dent Services
Metal Prds
Metal Prds-Pipe/Fab/Misc
Retail-Auto Parts
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 MED Medifast Inc 96
Top Technical MED Medifast Inc 96
Top Fundamental COG Cabot Oil & Gas Corp 26
Top Tech. & Fund. FTO Frontier Oil Corp 39
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
Best Overall ININ Interactive Intelligence 87
Top Technical ININ Interactive Intelligence 87
Top Fundamental CHS Chico's Fas Inc 14
Top Tech. & Fund. CHS Chico's Fas Inc 14
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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