Market Summary

The fourth quarter is traditionally the best performing quarter for the markets and the quarter got off to an excellent start this week. NASDAQ stocks continued to outperform the broader market with a weekly gain of 2.92% compared to 1.23% for the DJI and 2.02% for the S&P 500. The NASDAQ Composite is now up 15.11% for the year and as the chart below shows most of that came since August 16. The Comparative (to the S&P 500) Relative Strength line shows that while the NASDAQ lost ground to the broader market earlier in the year, that position reversed in May. This was the fourth successive positive week and the NASDAQ has only had one losing week in the last seven.

The chart shows the NASADQ has been stair-stepping up its 2 standard deviation Bollinger Band boundary and a pull-back to within the 1 standard deviation boundary can be expected but we expect the trend will remain upward after a short consolidation.

Regular readers will know that we have been bullish about market prospects, despite signs of a slowing economy, over the past few weeks and that stance continues. In particular we expect that 'new economy' stocks represented by the NASDAQ will continue to outperform the S&P 500 and DJI. This will be good for good for breakouts as our weekly breakout report below shows.

Some commentators have interpreted the revision to August's employment figures as indicating that the Fed may not need to lower interest rates at its next FOMC meeting on October 30. We think the Fed will lower rates another 1/4 point and the markets will again move higher because a deeper examination of Friday's Labor Department report shows that the numbers are not as strong as they might appear. Professor Roubini sees the following problems with the employment numbers and we assume the Fed will take a similar view and act again to lower rates:

“First, the August revision (+93k) was almost only government job which went from -28K to +57K (a +85K revision).

Second, employment in the private sector was only 73k and this has been its average for the last quarter; this is a weak figure for private sector job creation.  80% of job created in September were either in government or in health/education services.

Third, since the increase in the labor force is closer to 120k  per month this 73k average private jobs for the last 3 months represents a relatively weak job creation.

Fourth, losses are continuing in housing (-20k in September), manufacturing (-18k) and retail trade (-5k), but the housing losses are still mismeasured as many undocumented workers do not show up in the employment statistics.  

Fifth, the unemployment rate went up to 4.7% in September.

Sixth, the annual benchmark revision of employment figures up to March 2007 show 297k  less jobs than initially estimated by the BLS, this is a significant downward revision (25k per month between March 2006 and March 2007). Given the most recent weakening of the economy BED and annual benchmark revisions may further reduce in the future estimates of job creation between April and September.

Seventh, the year over year job growth has been falling for the last year and it is still falling in September. ”

Important note to Newsletter Subscribers who are not yet full subscribers: Our 14 day Trial is now completely free - no credit card needed to sign-up.

No new features this week.

What is a Breakout?

We are developing a set of 15 tutorials to assist new subscribers to better understand our site and the services we offer. This is the first.

A breakout occurs when a stock moves above a price level which previously presented resistance. This resistance price is called the breakout or pivot price. To increase the chances that the stock will continue to move higher after breakout, we also like to see the volume traded at the time of the breakout to be substantially above the average volume usually traded in the stock. Higher than average volume indicates there is considerable demand for the stock and the expectation is that higher than average demand will continue, at least for a short time until a new equilibrium is reached.

Here is an example of a very strong breakout above resistance from one of our flat base watchlists:

The increase in price on breakout day (17%) was accompanied by very strong demand and volume spiked to 6.7 times the recent (50 day) average. The strength of this breakout was exceptional and very few will show such a big price move on breakout day, but the exaggerated nature of this breakout serves to illustrate what a breakout is.

In this case, the stock continued to move higher for four days after breakout before profit taking caused it to pull back. It is quite normal to see a pullback after a breakout as the short term traders take their profits and that is not a signal for the longer term holder to sell. Often, as in this case, that pull back represents a second chance to buy into the breakout before the stock rises again.

Important note: we normally do not suggest chasing a breakout to more than 5% above the breakout. Since the pullback in this case did not come to within 5% of the breakout price, buying on the pullback would break our usual rule. However, because of the gap-up on breakout day, the strong price move and exceptional volume on breakout day and thereafter, the rule could have been broken in this case depending on your tolerance for risk.

We can now define what classifies a stock as a breakout on breakoutwatch.com: the stock must close above its breakout price and the volume at the close must be at least 1.5 times the 50 day average volume.

We monitor stocks on our watchlists in real time and send out email alerts when the intraday price reaches the breakout price and the projected volume for the day is more than 1.5 times the average volume. The email alerts are not a recommendation to buy the stock, they are to advise you that the stock has the potential to become a breakout by the end of the session. You may choose to take a full or partial position in the stock, but we suggest you do so only if you have previously reviewed the stock while on the watchlist and concluded that if it were to breakout, it has the characteristics that meet your investment objectives.

At the end of the day we send an email summarizing the day's alerts, also called breakout attempts, and the status of the stock at the end of the day. We categorize these breakout attempts as 'successful' if our breakout definition is met at the end of the day. Otherwise we report that they failed on price, failed on volume, or both. A successful breakout may pullback to the pivot point or lower in trading after the breakout day as short term traders take profits. This does not signify that the breakout has failed but may be a second chance to buy into the breakout if the technicals are still strong, such as an RS Rank which has not fallen since breakout day. We only consider a successful breakout to have failed when its price drops below 8% from the pivot.

We publish an analysis of the performance of successful breakout each week. The data is summarized in a chart on our hole page and the detailed report can be accessed by clicking the chart.

Each day we publish the Recent Breakouts Report which shows stocks that have broken out in the last 90 days. This report serves two valuable purposes:

1. It is a resource for finding 'second chance' breakouts that have pulled back as described above.
2. It shows how well breakouts are performing under current market conditions.

We published an analysis of the peformance of second chance breakouts in our newsletter of 9/22/07.

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.