Weekly Newsletter 09/09/06
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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  

Important new tool simulates realistic Tradewatch portfolio performance. See below.

Market Summary

The week began with optimism that interest rates were on hold and that the economy was slowing, but not so fast as to threaten a recession. Blue skies seemed ahead as oil prices were falling and a large oil find in the Gulf of Mexico promised to further relieve upward price pressure, but in the distant future. This sunny prospect took a more overcast look on Wednesday when higher than expected wage rises were reported, which could lead to price inflation if passed on to the consumer, and the Fed's 'beige book' showed economic activity falling. Profit warnings and inventory increases by large homebuilders added to the concern because a severe slump in home prices will curb consumer optimism and spending. Nervous investors were further alarmed by a statement from a Federal Reserve regional President which implied rate increases may not be over. These events brought two distribution days followed by a light volume recovery on Friday which was insufficient to offset the week's losses. The DJI lost 0.63%, the NASDAQ Composite, which had been the biggest gainer of late turned in the biggest loss of 1.25% and the S&P 500 gave up 0.92%. In this shortened week, volume overall was even lower than the prior week, so although this was a pullback, it was a minor correction when viewed against the gains of the last several weeks.

As usual, we focus now on the NASDAQ Composite which looked as though it may break through its 200 day moving average this week and reverse our market signal. The NASDAQ broke through prior resistance [1] on Monday and fell to secondary support [2] on Wednesday. This was not sustained and Friday saw it unable to break through the former support line [2] which was now resistance. To again attack the 200day moving average level, the index must now break through two resistance lines. A breakthrough of [2] would be a minor bullish signal and a breakthrough of [1] more convincing. Our model will remain at exit though until the 200dma is overcome. On the downside, a break through 2122 [3] would be bearish, especially if the 50 dma just below is broken.


 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

Simulated Tradewatch Portfolio Returns

A subscriber asked what the return on our Tradewatch Buy at Open strategy would be if you invested $10k in each position. There is no easy answer, as it depends on when you invest and how many positions your investment strategy allows you to hold at the same time. The only way to answer the question meaningfully was to build a tool which allows the backtesting of portfolio returns against realistic assumptions and time periods. We're pleased to make that tool available to Tradewatch subscribers now. It is available under the Tradewatch History menu choice.

Choosing Tradewatch History > Backtest presents you with the following screen:

The screen is mostly self explanatory, although the fixed position amount option may need some elaboration. If you choose a fixed position amount, then every position will be bought using the 1/nth of the initial portfolio size, where n is the number of positions. If not, then the position size will be calculated by dividing the portfolio cash balance by the number of available positions. If you sell at a profit, then your available cash increases and your next position size will be increased. Conversely, if you sell at a loss, your available cash is depleted and your next position size will be smaller.

Clicking the 'Run Simulation' causes the system to simulate buy and sell orders according to the history of Tradewatch listed stocks. Buys are made sequentially from the start date and sales are made as suggested by the Sell Assistant default behavior without stop loss or trailing stop options. Commission is calculated on each trade using the % you supply.

Running the default simulation as shown above provides the following result. It can take a little while depending on the length of the period being simulated, so be patient.

Clicking the 'View individual trades in Excel' button will open up an Excel spreadsheet of the actual trades that were simulated including those that not bought because of the portfolio size limitation.

The simulation tool allows you to experiment with different number of positions in your portfolio and over different periods. For example, we can compare a Tradewatch portfolio against the S&P 500 over the last 18 months during periods of rally and correction.

Now we can compare a Tradewatch portfolio to the S&P 500 using both the Buy at Open and Best Return strategies. We'll use position limits of 8 and 4 which are within the range usually recommended. We get some interesting results.

Portfolio Simulation S&P 500 Tradewatch
Buy at OpenBest Return
Using 8 positions
4/20/05 - 7/29/05 9.6% 19.2% 16.6%
7/29/05 - 10/13/05 -6.7% 3.1% 2.6%
10/13/05 - 5/8/06 13.6% 40.6% 24.2%
5/8/06 - 6/14/06 -8.9% -0.7% -2.8%
6/14/06 - 9/5/06 7.8% -3.8% -1.5%
Overall (4/20/05 - 9/5/06)15.7%50.6%56.8%
Using 4 positions
4/20/05 - 7/29/05 9.6% 14.6% 26.7%
7/29/05 - 10/13/05 -6.7% 10.2% -0.7%
10/13/05 - 5/8/06 13.6% 54.7% 50.4%
5/8/06 - 6/14/06 -8.9% -1.4% -5.6%
6/14/06 - 9/5/06 7.8% -8.9% -2.7%
Overall (4/20/05 - 9/5/06) 15.7% 62.5% 94.9%

The overall results beat the sum of the individual periods, because the sequence of buys and sells is different. Buying into a downturn produces losses, but not as severe as the overall market. Although the two strategies easily beat the S&P overall, it is interesting that they under-performed during the most recent rally. I don't have an explanation for that, except that our market signal said to stay in cash and that position is reflected in the Sell Assistant's daily recommendation. It is also interesting that a 4 position limit beats an 8 position limit. This may be because the first ones to be bought during a rally, outperform those that come later.

I can't emphasize too much that these are very realistic returns and are based on a wholly mechanical, reproducible system that requires little or no thought on the part of the tradewatch subscriber, other than to place buy and sell orders for execution the next day according to the stop and limit instructions given through Tradewatch.

Let me know what you think of this tool and how to improve it.

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 11392.1 -0.63% 6.29% enter
NASDAQ 2165.79 -1.25% -1.79% exit
S&P 500 1298.92 -0.92% 4.06% enter
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
Dow Jones
-0.63 %
Dow Jones
0.24 %
NASDAQ Composite
4.68 %
Dow Jones
6.29 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Food-Dairy Products Food-Dairy Products Oil & Gas-Cdn Integrated Oil & Gas-Cdn Integrated
 Most Improved Industry (by change in technical rank2)
+ 41
+ 59
+ 120
Food-Meat Products
+ 160
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 28 23.85 3.52% -0.8%
Last Week 43 22.62 7.64% 0.56%
13 Weeks 337 24.62 9%
Breakout Count for Week
Oil & Gas
Oil & Gas-U S Explr/Prod
Oil & Gas
Oil & Gas-Mach/Equip
Computer Software
Comp Software-Security
Computer Software
Comp Software-Enterprise
Diversified Operations
Diversified Operations
Electr-Semicndtr Equip
Electr-Semicndtr Mfg
Internet-Secur/Network Svcs
Media-Cable/Satellite TV
Oil & Gas
Oil & Gas-Refining/Mktg
Oil & Gas
Oil & Gas-Field Services
Steel -Producers
Telecomm-Services Fgn
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 HL Hecla Mining Co 112
Top Technical VRTB Vestin Realty Mortgage II Inc 91
Top Fundamental FCFS First Cash Financial Svc 57
Top Tech. & Fund. CWTR Coldwater Creek Inc 45
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 SNTS Santarus Inc 89
Top Technical PCCC Pc Connection Inc 72
Top Fundamental PSYS Psychiatric Solutions Inc 40
Top Tech. & Fund. DRIV Digital River Inc 0
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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