Market Summary

Since the current rally began on August 18 we have been bullish about the markets because we believed the Administration and Federal Reserve would not allow the housing, sub-prime mortgage debacle and resulting credit squeeze to drag the markets down. The policies followed since mid-August have successfully steadied the markets and this week produced sizeable gains. The DJI had its best week since April and gained 2.51%, while the NASDAQ Composite gained 1.42%, and the S&P 500 rose 2.11%. Volumes remain below the 50 day moving average, in part because the average was moved higher by the wave of selling in August, and also because although confidence is returning, there is still uncertainty over the condition of the major financial houses.

While the Fed and Treasury may have saved the stock market, at least in the short term, it is uncertain if they can save the economy. Friday's economic news showed retail sales and industrial production during August were lower than analysts expected. If auto sales are excluded, which were artificially high due to sales promotions to make way for the 2008 model year, retail sales fell 0.4%, indicating that consumers are tightening their belts. This comes after news last Friday that the economy is shedding, rather than creating, jobs. The Federal Reserve is widely expected to cut interest rates by 0.25% on Tuesday with the chances of a 0.5% cut apparently diminished. A 0.5% cut would further rally the markets but there is also the possibility that they will hold rates steady to support the dollar and avoid stoking inflation. The impact on the stock market would then be extreme, which makes a 0% cut unlikely.

The number of stocks making breakout attempts improved this week although a relatively small number, nine, were confirmed. You will recall that a breakout is only confirmed if the volume is at least 1.5 times the 50 day average and as we noted above, those averages have been elevated by the August sell-off, so it is more difficult for a stock to qualify as a successful breakout. Those that we did count as 'successful' made a healthy gain by week's end by an average of 4.12%. Two stocks, CBLI and NWK made intra-day gains of over 20%. Only one of the breakouts, IRBT closed the week with a small loss, of 1.5%.

No new features this week.

Comparison of Successful Alerts to Alerts Issued - Revised with Performance Results

Last week we published some statistics on the number of alerts that were considered successful at the day's close compared to the number of alerts issued and the total number of times stocks appeared on each of our watchlists. We were surprised by the apparently high success rate of breakdowns from flat base patterns and have reviewed our calculations. There was indeed an error and the correct numbers for breakdowns from the flat base patterns are shown below.

As an exercise we also looked at the returns possible from shorting stocks if they breakdown from the either a flat base top or bottom compared to market conditions. We compared the period since July 1, 2007 to the overall returns since March, 2005 when we first started issuing breakdown alerts. The average returns from the breakdown price to the subsequent low, before the price recovered to the breakdown price were:

The conclusions to be drawn from this twofold:

1. Shorting is more profitable in a downtrend. No surprises there!
2. Shorting a stock that has fallen into a flat base (or rectangle bottom) is less profitable than shorting a stock that has risen to a flat base (a rectangle top).

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