Weekly Newsletter 03/29/08
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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

Gravestone Doji Signals Probable End to Rally

The market indexes that are of most interest to CAN SLIM* style investors are the NASDAQ Composite and Russell 2000. These indexes contain the stocks that are most likely to have the biggest price moves, under normal market conditions, and therefore have the greatest potential for profit. For these reasons, our weekly analysis has tended to focus on the NASDAQ and more recently on the Russell 2000 since we added coverage of that index to our daily market analysis feature. Alas, these are not normal market conditions due to the risk that Government or Federal Reserve intervention can suddenly move the markets dramatically. For several months now we have cautioned our subscribers to be aware that the Administration would do everything in its power to support the markets in an election year and that surprise intervention would increase market risk.

It is clear now though that supporting the markets is a secondary goal and that the primary objective is to save the financial system from systemic collapse. In its support for the Bear Sterns takeover, and the unprecedented decision to open the discount window to non-bank primary dealers (who previously could not borrow Fed funds directly, but must deal with large banks) the Fed has signaled that no large brokerage institution will be allowed to fail. This immediately stopped the short selling of Lehman Brothers (LEH) and triggered a market rally that many pundits said was the turning point. LEH received another boost when it announced quarterly results that beat expectations. But as we know, accounting is an art, not a science and it seems a Michelangelo was at work in the preparation of the Lehman results. Through careful interpretation of the SEC's 'tangible equity' rule they were actually able to count their debt as equity!!! (see portfolio.com). In other words, their results are suspect and may hide more than they reveal. Confidence in the markets can only be maintained through transparency, and as we shall see in a moment, the confidence that we have seen the market bottom is now fading as another down-leg begins.

Another confidence issue: while asset write-downs so far have been large (Morgan Stanley estimate of $400 billion), they have the potential to be much larger. The balance sheets of the banks and brokerages are benefiting from an accounting rule that says they do not have to 'mark-to-market' if the assets are triple-A rated and they can carry them on their balance sheets at par. As long as the monoline insurance brokers (Ambac, MBIA, etc) maintain their triple-A rating, the assets they insure are triple-A rated also. If the monolines get down-rated, more blood will flow. Some observers believe more losses are inevitable (Nouriel Roubini: " The losses that we're facing at this point — $1 trillion — is the floor, not the ceiling").

We can now see why confidence that we have seen the bottom is fading and that brings us to the 'Gravestone Doji'. Both the NASDAQ and the Russell 2000 weekly charts show a near perfect 'Gravestone Doji' pattern. The tall shadow implies that the bulls drove prices higher but lost almost all their gains by week's end. This implies these indexes will open lower next week and that the rally is in jeopardy.

nasadq Gravestone Doji
russell 2000 Gravestone Doji

Another indication of the lack of trust in financial stocks is the recovery of Ultrashort Financials (SKF) after collapsing following the Bear Sterns bailout announcement. Although deep into the handle of a CwH formation, this ETF offers the possibility to profit from the lack of confidence in this sector, which is now close to the bottom of our industry rankings.

*CAN SLIM is a registered trademark of Data Analysis, Inc. Breakoutwatch.com is not affiliated with Investor's Business Daily or Mr. William O'Neil


 New Features this Week Additional Value that we added this week

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

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 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Market1
Dow 12216.4 -1.17% -7.9% enter
NASDAQ 2261.18 0.14% -14.75% exit
S&P 500 1315.22 -1.07% -10.43% enter
Russell 2000 683.18 0.26% -10.82% N/A
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
S&P 500
-2.57 %
Dow Jones
-8.6 %
Dow Jones
-12.08 %
Dow Jones
-7.9 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Cleaning Products Cleaning Products Cigarettes Cigarettes
 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 6 13.08 5.51% 1.31%
Last Week 12 12.77 6.39% 1.71%
13 Weeks 197 13.23 8.6%
Breakout Count for Week
Independent Oil & Gas
Business Software & Services
Management Services
Oil & Gas Drilling & Exploration
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 UFPT Ufp Technologies Inc 108
Top Technical TUX Tuxis Corporation 78
Top Fundamental ADBL Audible Inc 62
Top Tech. & Fund. CVA Covanta Holding Corp 48
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 PQ Petroquest Energy Inc 67
Top Technical CRK Comstock Resources Inc 52
Top Fundamental NBR Nabors Industries Inc 38
Top Tech. & Fund. PQ Petroquest Energy Inc 67
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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