Weekly Newsletter 10/06/07
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Market Summary Weekly Breakout Report Top Breakout Choices Top 2nd Chances New Features Tip of the Week
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 Weekly Commentary  

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.

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 New Features this Week Additional Value that we added this week

No new features this week.

This Week's Top Tip Tips for getting the most out of our site

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.

Breakout Alerts

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.

Successful Breakouts

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.

Second Chance Breakouts

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

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 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Market1
Dow 14066 1.23% 12.86% enter
NASDAQ 2780.32 2.92% 15.11% enter
S&P 500 1557.59 2.02% 9.82% enter
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
NASDAQ Composite
2.92 %
NASDAQ Composite
4.21 %
NASDAQ Composite
8.64 %
NASDAQ Composite
15.11 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Aerospace/Defense - Major Diversified Aerospace/Defense - Major Diversified Aerospace/Defense - Major Diversified Aerospace/Defense - Major Diversified
 Most Improved Industry (by change in technical rank2)
+ 54
+ 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 24 13.31 5.22% 3.18%
Last Week 21 12.31 24.15% 16.93%
13 Weeks 242 14.15 14.3%
Breakout Count for Week
Information Technology
Telecom Services - Foreign
Aerospace/Defense Products & Services
Security Software & Services
Research Services
Diagnostic Substances
Semiconductor - Specialized
Asset Management
Medical Appliances & Equipment
Life Insurance
Industrial Equipment & Components
Diversified Machinery
Industrial Electrical Equipment
Heavy Construction
General Building Materials
Industrial Metals & Minerals
Electronics Stores
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 ROY Intl Realty Corp Ord 100
Top Technical TPC SunCom Wireless Holdings Inc 36
Top Fundamental TRMB Trimble Navigation Ltd 41
Top Tech. & Fund. TRMB Trimble Navigation Ltd 41
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 CIA Citizens Inc 88
Top Fundamental BLUD Immucor Inc 37
Top Tech. & Fund. BLUD Immucor Inc 37
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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