Weekly Newsletter 07/08/06
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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

Economic data, oil price rises, geopolitical uncertainty and profit warnings with little countervailing good news combined to bring the markets lower this week. A stronger than expected private sector job growth report on Wednesday provoked a sell-off as investors feared the economy was sufficiently strong that the Fed would not be constrained in raising interest rates further. This increased interest in Friday's employment report from the Department of Labor which delivered a hoped-for contrary result showing the economy created far-fewer jobs in June than was expected. This positive result was offset, however, as the report also showed that inflationary pressure was increased by rising wages which raised the specter of weakening growth accompanied by rising inflation - the feared 'stagflation' scenario. The market's mood was not helped by increasing international tensions following North Korea's celebration of July 4th with multiple missile launches, which drove up oil prices, and revelations of further terrorist threats.

For the week, the DJI lost 0.53%, the NASDAQ slid 1.94% and the S&P 500 lost 0.37%. There were three distribution days with Friday's marking the fifth in fifteen days for the NASDAQ. If our market model was not already at 'exit' for that index, then it would have become so. The market's behavior this week confirms our cautious attitude towards new investments at this time and we restrict ourselves to relatively low-risk investments selected for our TradeWatch 'Best Return' list. As the chart below shows, the NASDAQ has now given up most of its gains since the follow-through day of June 29. The prior resistance level at 2152.56 offered support on Thursday but that was broken on Friday. Unless there is an unexpected recovery on Monday, the PSAR (the dotted line on the chart) will go to a short position and the next support level will be just below 2100.

The number of successful breakouts fell to 10 this week and although there were some intra-day gains to be made averaging 4.6%, all closed the week below their pivot points.

Although the number of TradeWatch 'Best Return' selections has fallen off in the last two months. returns continue to very good with an average return on closed positions of 7.2% with an average hold period of 28 days giving an annualized return of 107.3%. Recent successes were KNOT (5.6%), CRAYD (14.3%), IMCO (23.41%), EMIS (42%) and ZOLT (149.8%).

Get a 14 day Trial of our premium 'Platinum' service and TradeWatch for just $9.95 and if you subsequently subscribe to any subscription level we will credit your $9.95 to your subscription.

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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

Position Sizing and Risk Management

Last week we described how to use BaseWatch to find stocks building their bases which prompted one newsletter reader to say "The basewatch screen in this weeks newsletter looks like one of your best. What I like is that these stocks can be bought using a meaningful stop placed just below the previous low of the last 4 weeks."

He reminded me of a topic we have not yet covered on the site which is the importance of position sizing and its relationship to risk management and overall portfolio returns. He was also kind enough to provide a spreadsheet that allows the calculation of position size once you have set your overall portfolio size and risk per position. You can download a copy of the spreadsheet here.

To use the spreadsheet:

  1. Set your desired overall portfolio size in cell D1.
  2. Set your risk per position in cell D2.
  3. Enter your initial stock conditions in 'Initial Conditions' columns. The appropriate position size will be calculated and shown in the 'Calculate Number of Shares to Buy' column.
  4. You can continue to buy shares until your maximum portfolio size is reached.
  5. Update the latest price and trailing stop in the Current Status columns and gain/loss and overall risk or 'heat' will be calculated.
  6. As you add positions, you will need to copy down the formulae from the line above.

Here is a link to an excellent explanation of risk and risk management by Ed Seykota.

Investment Advisors Using our Service

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”. 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.

PivotPoint Advisors, LLC takes a technical approach to investment planning and management. A breakoutwatch.com subscriber since May, 2004, they use breakouts, market signals, and now TradeWatch to enhance returns for their clients. Learn more at http://pivotpointadvisors.net or contact John Norquay at 608-826-0840 or by email at john.norquay@pivotpointadvisors.net.

Note to advisors: If you would like to be listed here, please contact us. As a service to those who subscribe to us, there is no additional charge to be listed here.

Get a 14 day Trial of our premium 'Platinum' service and TradeWatch for just $9.95 and if you subsequently subscribe to any subscription level we will credit your $9.95 to your subscription.

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 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Market1
Dow 11090.7 -0.53% 3.48% enter
NASDAQ 2130.06 -1.94% -3.41% exit
S&P 500 1265.48 -0.37% 1.38% enter
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
S&P 500
-0.37 %
S&P 500
0.41 %
Dow Jones
2.76 %
Dow Jones
3.48 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Electr-Laser Systems Electr-Laser Systems Steel -Specialty Oil & Gas-Cdn Integrated
 Most Improved Industry (by change in technical rank2)
Metal Prds-Distributors
+ 39
Metal Prds-Distributors
+ 106
Food-Dairy Products
+ 158
Metal Prds-Fasteners
+ 157
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 10 17.31 4.45% -1.29%
Last Week 37 17.69 8.07% 3.98%
13 Weeks 285 19.38 9.76%
Breakout Count for Week
Electr-Semicndtr Mfg
Finance-Misc 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
Best Overall CANI Carreker Corporation 98
Top Technical LMNX Luminex Corporation 49
Top Fundamental FORM Formfactor Inc 53
Top Tech. & Fund. SMDI Sirenza Microdevices 73
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 GMTC Gametech Internat Inc 78
Top Technical GMTC Gametech Internat Inc 78
Top Fundamental GMTC Gametech Internat Inc 78
Top Tech. & Fund. GMTC Gametech Internat Inc 78
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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