Weekly Newsletter 01/11/08
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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 Signal goes to 'Exit'

Our market model gave an exit signal for the NASDAQ on Monday just in time for Tuesday's big sell-off. The signal came a little late because of fluctuating volume over the holiday period when accumulation/distribution days were unreliable. For the week, the NASDAQ lost 2.58%, the DJI slipped 1.51% and the S&P 500 0.75%.

A look at the two year weekly chart for the NASADQ shows the perilous technical situation for the index. Charts for the DJI and S&P 500 are similarly bearish. The chart shows that the index completed a Head and Shoulders Top pattern last week when it broke through the neckline. Interestingly, that neckline coincided with the long term support line, so a breakdown from that H&S top has more than usual significance. On Wednesday the index rebounded from the medium term support line formed by lows for this year and a tentative rally began which was looking rather sickly by Friday. We expect the market to continue to make strong moves up and down as Fed and Treasury officials continue to make comments about the economy's strength and/or weakness but we favor the view that we are at the beginning of a bear market that could last until well into 2009. Treasury Secretary Paulson is now quite sanguine, and surprisingly frank for an administration official, about the state of the economy. Bloomberg news has released extracts from an interview with Paulson to be aired this weekend which shows his concern:

"There are signs the economy is slowing down fairly rapidly"
"We are looking at things that could be done quickly''
``Time is of the essence''
"There are risks to the downside"
Paulson said the housing market poses the biggest threat to the economy and made clear he expects home prices to continue to fall. "There's no doubt that this hasn't run its course yet''

With house prices continuing to fall, mortgage resets and foreclosures mounting, unemployment rising and credit tightening, it is easy to see how the economy and markets can falter as we come to the end of the consumer led expansion of the last few years.


 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

Significance of Volume in High Tight Flag Breakouts

We continue our analysis of the High Tight Flag (HTF) pattern today.

We introduced alerts from the pattern this week but we departed from our usual emphasis on requiring heavy volume on breakout. To issue an alert, we only require that the intraday price exceed the pivot price and do not require that the volume exceed a specific multiple of the average daily volume (adv). This week we did an analysis of the volume on breakout day and concluded that this was the right decision.

We looked at the breakout day volume on all HTF patterns that we recognised since 2000. A histogram of the number of breakouts compared to the breakout day volume shows that breakouts can occur at any multiple of adv, although they are more common between 0.3 times adv and 2.1 times adv.

We also looked at the extent to which the eventual gain is related to the volume multiple on breakout day. We found that there was a significant correlation but there was no reason to set a threshold volume before investing in breakouts from this pattern. This scatterplot shows the regression line of max. gain after breakout to multiple of adv and its evident that high returns are possible even on low breakout volume.

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 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Market1
Dow 12853.1 0.41% -3.1% enter
NASDAQ 2488.52 -0.64% -6.17% exit
S&P 500 1420.33 0.62% -3.27% enter
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
Dow Jones
-1.56 %
Dow Jones
-3.93 %
S&P 500
-1.77 %
Dow Jones
-3.1 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Major Integrated Oil & Gas Major Integrated Oil & Gas Major Integrated Oil & Gas Major Integrated Oil & Gas
 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 15 13.92 6.86% 3.74%
Last Week 15 14.23 5.37% -1.05%
13 Weeks 199 15.62 10.42%
Breakout Count for Week
Foreign Money Center Banks
Specialty Chemicals
Electronic Equipment
Scientific & Technical Instruments
Oil & Gas Pipelines
Closed-End Fund - Foreign
Investment Brokerage - Regional
Diversified Investments
Specialized Health Services
Health Care Plans
Long-Term Care Facilities
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 INOD Innodata Isogen Inc 110
Top Technical CHTP Chelsea Therapeutics International Ltd 77
Top Fundamental FTI Fmc Technologies 43
Top Tech. & Fund. FTI Fmc Technologies 43
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 SUNH Sun Healthcare Group Inc 57
Top Technical SUNH Sun Healthcare Group Inc 57
Top Fundamental OMG Om Group Inc 37
Top Tech. & Fund. OMG Om Group 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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