Market Summary

Market conditions altered in favor of growth and technology stocks this week as interest rates fell and the cost of investment and money borrowed for acquisitions declined accordingly. This is good news for our subscribers as our methods favor growth and technology stocks.

The Federal Reserve sent a strong signal to the markets that they will "act as needed to foster price stability and sustainable economic growth" by cutting the prime interest rate by 0.5% when a cut of only 0.25% was expected. They reinforced that signal with another 0.5% cut in the discount rate. Market reaction was euphoric with the biggest 1 day gain in share prices in four years on Tuesday. The rally continued on Wednesday and profit taking did not occur until Thursday on much lighter volume. The markets closed the week with another gain on Friday for an overall gain of 2.81% by the DJI, 2.65% by the NASDAQ Composite and 2.80 % by the S&P 500.

The cut in interest rates also helps those with adjustable rate mortgages as they will now adjust upwards to a lesser extent and so foreclosures may be less severe than previously thought. On the negative side, the cut in interest rates risks stoking inflation as the dollar slides further making imports, especially oil, more expensive. Clearly, the FOMC weighed the risks of inflation against the risks of recession and chose inflation as the lesser of two evils.

Tuesday's gains on strong volume represented a breakout from a cup with handle pattern for the NASDAQ and another new pivot was set on Wednesday.

Friday's volume was above the recent average because Friday was a 'quadruple witching' day and also the day on which components of the S&P 500 were rebalanced.

The number of breakouts shot up to 29 this week with an average gain by the close of 4.4%, once again comfortably beating the major indexes. Those subscribers who jumped on ASTI when we issued an alert on Tuesday morning realized a 61% gain by Friday's close.

Each week we publish a list of what we call 'second chances' which are stocks that broke out during the week but are still within a buyable range. In response to an enquiry from a subscriber, we publish an analysis of the performance of these stocks in this week's 'Top Tip'.

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No new features this week.

Performance of 'Second Chance' stocks

Each week in our newsletter we publish a list of four 'second chance' stocks. These are stocks that broke out during the week from our cup-with-handle watchlist, but are still within 'buyable range' . To qualify the stocks must be between -8% and +5% of their breakout price. The four stocks we select are those that are within this price range and have the best expected gain, best CE score, best technical score and best fundamental score. Following a request from a subscriber, we have analysed the potential results that would be obtained if you bought each of these stocks at the open on the next session after newletter publication and held them for 12 months at the most.

Methodology

The methodology we used is similar to that which is used for our 'Performance Report' of all breakout stocks. We assumed that each stock was bought at the open of the next session. We then tracked each day's high and low price for the next 12 months.

• We determined which stocks met the newsletter 'second chance' criteria back to the beginning of 2004 and then used the open price at the next session as the 'buy' price.

• If the stock rose to 5% or more above the buy price, the trade was considered a 'success' and the subsequent highest price achieved was used to calculate the profit on the trade

• If the stock failed to reach 5% and fell back to 8% or more below the buy price, then the trade was considered a fail and the loss was calculated as 8%

• if the stock remained within the -8% and +5% range, then it was considered to be still 'in-range' and the highest price achieved was used to calculate the profit.

• An overall return was calculated including the 8% stop losses.

The results were as follows.

As can be seen, the most successes and the least fails were for second chances that had the top expected gain value each week. This is as we would expect because our 'Expected Gain' calculation is designed to give the highest score to those stocks with characteristics that we have determined are most likely to give the best return within 12 months. These stocks also gave the best return overall. The second best scoring stocks were those that had the best CET score each week. This also doesn't surprise us because we have always thought that the technicals of a stock were a better indicator of its likely performance after breakout than the fundamentals.

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.

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