Weekly Newsletter 05/26/07
Login   Trial   Guest
You are receiving this email because you are or were a BreakoutWatch.com subscriber, or have subscribed to our weekly newsletter. This newsletter summarizes the breakout events of the week and provides additional guidance that does not fit into our daily format. It is published each weekend.
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

NASDAQ Market model signals 'exit'

The NASDAQ suffered its third weekly loss in succession this week and on Thursday registered its fifth distribution day in eleven sessions causing our market model to signal an 'exit'. The DJI and S&P 500 suffered their first loss in eight weeks. All three indexes pulled back on lighter weekly volume indicating that this is a consolidation in response to the large gains made, particularly by large-cap stocks, over the past 2 1/2 months.

Our market model backtests well (see below) but it has not performed well over the last two months. Since issuing its first exit signal for the NASDAQ on March 13 when it closed at 2350.57, the index has risen 8.8%. The other major indexes have fared even better with gains of 11.9% for the DJI and 10.0% for the SPX.Will it be any different this time? We cannot tell, but the markets are certainly due to take a breather. Here are some facts to consider that might color your point of view.

  • Funds continue to flow into institutions, albeit at a slower rate, and are split fairly evenly between domestic and foreign funds. Including ETF activity, equity funds reported net cash inflows totaling $3.235 billion in the week ended 5/23/07 with Domestic funds reporting net inflows of $1.435 billion and Non-domestic funds reporting net inflows of $1.800 billion; (AMG Data Services).
  • Short interest has been rising since mid-2006 as it did before the market peak in 2000. While short interest provides a floor under the market as the shorts cover, eventually the bearish sentiment wins out. See this Bloomberg chart.
  • Statistically speaking the mantra “Sell in May and go away” has held true for the S&P 500 since 1950.
  • The Bollinger Bands around the weekly NASDAQ chart have tightened considerably. This usually presages a breakout to the upside or downside, although the direction of the move cannot be determined from the chart.

We wish all our newsletter subscribers a happy and safe memorial Weekend. Remember the markets are closed on Monday.

 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

How the Market Model Works.

Market signals are generated by our Market Model based on distribution days and follow through days. A distribution day is one where the index closes down on higher volume than the previous day and follow through day is an accumulation day that occurs within a range of days (see below) after a market bottom. Note that our definition of a distribution day is clear cut and simple. This explains why our distribution day count on the NASDAQ this week climbed to five while a prominent investment daily only has the count at 3.

Each day after the market closes we look at the market movement for the day and assess whether the current signal should change.

If the current signal is 'enter', then we count the number of distribution days for each of the three major indexes over the last few trading sessions. We will issue an 'exit' signal if the number of distribution days exceeds a threshold as follows:

Distribution Day Thresholds for Exit Signals
Index
Distribution Days
No. Of Sessions
DJI
7
12
NASDAQ
5
15
S&P 500
9
18

If the current signal is 'Exit', then we look for the day on which the index set its lowest intraday low since the last exit signal was issued and closed above that low. We'll call that 'day 1' of the recovery since it closed above the lowest low. We then look for a follow through day where the index closed at least 1.5% above the close on 'day 1' and volume exceeded the previous day's volume (an accumulation day). That follow through day must occur within a certain minimum and maximum number of days after day 1 as follows:

Follow Through Day Limits
Index
Minimum Day No.
Maximum Day No.
DJI
4
7
NASDAQ
4
10
S&P 500
4
9

There is also an additional requirement that the close must be at least 0.05% above its 200 day moving average.

There is more information on how we built the model here.

How the Model worked in 2006

The model successfully avoided the large correction that began in May when it issued a sell signal on May 10. However, the requirement that a follow-through day can only occur if the index is above its 200 day moving average, meant that an enter signal was only issued on September 13, well after the market bottom. this significantly reduced the overall return and the model ended up breaking about even. The following chart shows the entry and exit points for 2006 and the returns for the index and the returns achieved if using the enter and exit signals. The 200 dma is also shown so you can see how the enter signal was delayed.

Model Performance Over 5 Years

Over the past five years the model has outperformed the NASDAQ Index by a factor of almost three:

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.

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.

14 Day Platinum Trial
(you will need to allow pop-ups from breakoutwatch.com to see the subscription form)


 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Market1
Signal
Dow 13507.3 -0.36% 8.38% enter
NASDAQ 2557.19 -0.05% 5.88% exit
S&P 500 1515.73 -0.46% 6.87% enter
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
NASDAQ Composite
-0.05 %
Dow Jones
1.2 %
Dow Jones
3.4 %
Dow Jones
8.38 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Tobacco Products, Other Tobacco Products, Other Tobacco Products, Other Tobacco Products, Other
 Most Improved Industry (by change in technical rank2)
Aluminum
+ 54
Aluminum
+ 99
Long Distance Carriers
+ 213
Long Distance Carriers
+ 210
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 17.08 0.98% -1.91%
Last Week 24 18.46 4.17% -0.08%
13 Weeks 293 19.54 11.23%
2.29%
Sector
Industry
Breakout Count for Week
FINANCIAL SERVICES
Closed-End Fund - Debt
5
FINANCIAL SERVICES
Closed-End Fund - Equity
4
ENERGY
Oil & Gas Refining & Marketing
2
UTILITIES
Electric Utilities
2
AEROSPACE/DEFENSE
Aerospace/Defense Products & Services
1
COMPUTER SOFTWARE & SERVICES
Business Software & Services
1
ELECTRONICS
Scientific & Technical Instruments
1
ENERGY
Independent Oil & Gas
1
FINANCIAL SERVICES
Closed-End Fund - Foreign
1
HEALTH SERVICES
Medical Appliances & Equipment
1
INTERNET
Internet Software & Services
1
MANUFACTURING
Industrial Electrical Equipment
1
MANUFACTURING
Diversified Machinery
1
MATERIALS & CONSTRUCTION
Cement
1
TELECOMMUNICATIONS
Telecom Services - Foreign
1
TELECOMMUNICATIONS
Wireless Communications
1
TRANSPORTATION
Air Delivery & Freight Services
1
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
Category
Symbol
Company Name
Expected Gain1
Best Overall ICOC Ico Inc 102
Top Technical MPWR Monolithic Power Systems 47
Top Fundamental CPX Complete Production Services Inc 29
Top Tech. & Fund. CPX Complete Production Services Inc 29
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
Category
Symbol
Company Name
Expected Gain1
Best Overall SAPE Sapient Corporation 75
Top Technical EAGL Egl Incorporated 21
Top Fundamental ISRG Intuitive Surgical Inc 18
Top Tech. & Fund. ISRG Intuitive Surgical Inc 18
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.

If you received this newletter from a friend and you would like to receive it regularly please go to the BreakoutWatch.com site and enter as a Guest. You will then be able to register to receive the newsletter.

Copyright © 2007 NBIcharts, LLC dba BreakoutWatch.com. All rights reserved.
" BreakoutWatch," the BreakoutWatch.com "eye" logo, and the slogan "tomorrow's breakouts today" are service marks of NBIcharts LLC. All other marks are the property of their respective owners, and are used for descriptive purposes only.


To unsubscribe from further breakoutwatch.com newsletters, please click here. You may also submit a written request to breakoutwatch.com, PO Box 790861, Paia, Hi 96779. Upon receipt, unsubscribe requests will be processed within 14 days.