|Weekly Newsletter 08/05/06|
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Head and Shoulders chart pattern to go live on Monday - see this weeks Top Tip
The markets provided a mixed result with the NASDAQ lagging once again while the DJI and S&P 500 managed to tread water. For the week, the NASDAQ lost 0.43% while the DJI gained 0.18% and the S&P 500 scraped a 0.06% gain.
The DJI and S&P 500 are now above both their 50 and 200 day moving averages and making slow but fitful progress since the bottom on July 18. In contrast, the NASDAQ attempted to rise above its 50 dma on Friday but fell at the hurdle. The markets are sending the same signal as our market model: avoid the NASDAQ and be very selective about large cap stocks.
It is somewhat pointless to review charts at this stage as everything depends on the outcome of the Federal Reserve's Open Markets Committee meeting next week. The markets appear to be convinced that the Fed will not raise interest rates again because of the signs that the economy is slowing. On the other hand, there is evidence that inflation is accelerating rather than slowing. The 'Personal Consumer Expenditure' (PCE) number released last Tuesday showed a year-on-year increase of 2.4%, the highest since 1996. The PCE is the Fed's preferred measure of inflation because it represents a realistic view of the rate of inflation in the basket of goods that consumers are actually buying, as opposed to the CPI which is more artificial. Because the Fed's primary mandate is to control inflation, they must be concerned about the growth in that indicator. If the Fed holds rates steady, then the markets will focus on economic data to discern the prospects for future corporate earnings. If the Fed raises rates again, then stocks will be perceived as overvalued at their present levels.
The number of breakouts rose slightly this week and was well above the 13 week moving average. The number of breakouts is a gauge of market strength and the trend reflects the progress the large caps have made over the last three weeks. Most breakouts have closed within the 5% range offering good buying opportunities but not spectacular gains. On average the week's breakouts beat the market averages though to close 1.1% above their breakout price.
|New Features this Week||Additional Value that we added this week|
See our Top Tip below.
|This Week's Top Tip||Tips for getting the most out of our site|
Beginning Monday, August 7, we will begin sending email alerts when stocks on our Head and Shoulders watchlist breakdown to their breakdown price and their projected daily volume is at least equal to the 50-day average volume. These will be sent to Gold and Platinum subscribers who have indicated they wish to receive breakdown alerts in the Account Management > Update Account area of the site.
Stocks in Head and Shoulder chart patterns (H&S) are displayed in Mine for Candidates > HeadnShoulderWatch. We modified the display to include more information about the stocks and added some interactivity to the charts so the daily open, high, low, close and volume is shown as you move your mouse over the candlesticks.
The display can take a few seconds to load because we are displaying all the charts on the same page. This avoids clicking the symbol to get a new chart as we have done in our other displays. Because there are only a handful of stocks on the list, this is more efficient. If the list starts to get quite long then we wil have to revise the display.
It is important to understand that the algorithm that recognizes H&S patterns cannot be certain that there is a definite right shoulder if the stock has just made a new local high. Consider CBK as it was last Thursday.
It had just made a new local high and was labeled as a right shoulder (R.S.) but we can't be certain it is a true right shoulder at this point. The stock could decline to make a true R.S. or go on to make a higher local high in the next day or so. In cases like this, although we can't be sure the current date is a true R.S., we put it on the watchlist because it may breakdown on the next day. This happened quite often in our backtest (14% brokedown within 1 day).
We can have more confidence that the R.S. is a true R.S. as we move forward and another local high isn't set. We can only be absolutely certain that it was a true R.S. when the breakdown occurs. In the backtest, 50% of breakdowns occurred within 7 days.
Stocks will also appear on the H&S watchlist if thethey have broken down and then retraced to above their breakdown point. This is quite common and they can breakdown several times before recovering , if at all.
As always, we welcome your comments and suggestions. Please post them to the Breakoutwatch Forum.
Investment Advisors Using our Service
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|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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