Weekly Newsletter 10/31/08
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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  

This week's newsletter has some exciting new content. It is lengthy, but we hope you will read it all and benefit from it.

There were several signs that market conditions for swing traders and medium term investors were improving this week:

  • Tuesday's near record gains were sustained through to week's end. This is contrary to the recent history when large gains have been followed by similarly large losses
  • As the market summary below shows, the indexes made some very impressive gains. The Russell 2000 performed best with a 12% gain
  • The gains were held into the close on Friday, indicating that nervousness about weekend events has diminished
  • TED Spread and Libor rates are coming down slowly, although they are still way too high for free credit flow.
  • Most importantly for our subscribers, we are starting to see some breakout attempts with two being successful. These were the first successful breakouts since October 2. AFAM, which broke out on Thursday and was selected by our highly acclaimed 'BOW' filter, closed 12.5% above its breakout price.
We don't know if we have seen the bottom of this bear market yet, but we expect that immediately following the election the winning senator will take the lead in proposing legislation that will alleviate the depth of the recession we are already in. We know the Democrats are in favor of a new stimulus package and Martin Feldstein, an advisor to the McCain campaign, has also proposed a stimulus plan. So there is a good chance of bipartisan approval for new stimulus measures, whomever is elected President on Tuesday.

So with valuations low, and prospects for a sustainable rally improving, this is a good time to be contemplating returning to the market. For this reason, we are expanding our daily market analysis statistics to include the Wilshire 5000, which is the broadest measure of US equities performance, and adding new market trend metrics.
 New Features this Week Additional Value that we added this week

Today we are re-introducing our market signals after dropping them for a few weeks because they were clearly not appropriate under the new market conditions. We are now adopting a a trend identification approach rather than a simple 'enter' or 'exit' rule. For the new signals we have chosen to follow five indexes that reflect different aspects of the market:

  • The Dow Jones Industrials (DJI) is a price weighted index that tracks 30 large cap stocks representative of the overall US economy.
  • The S&P 500 (SPX) is a market capitalization (share price times the number of outstanding shares) weighted index of the largest 500 US stocks traded on the NYSE and NASDAQ exchanges
  • The NASDAQ Composite Index (IXIC) is a market capitalization weighted index of over 3000 stocks and ADR's that trade on the NASDAQ exchange. Because it includes foreign stocks it is not exclusively representative of the US market. The NASDAQ Composite is considered the most representative index of growth stock and tech. stock performance.
  • The Russell 2000 (RUT) is a market capitalization weighted index of the smaller 2000 companies in the Russell 3000.
  • The Wilshire 5000 (DWC) is a market capitalization weighted index of the market value of all stocks actively traded in the USA. As such, it represent the overall market performance.

For each of these indexes we have developed a model that determines the current trend of the index in question. We report this trend as "up" or "down" on our Market Analysis page each day. If one is invested only when the trend is "up" then one expects that the overall return over an extended period of time will be higher than if one were to "buy and hold" for the same period.

The charts below show the model applied to the five indexes since 2001. The charts show that by being invested in the index only during a model identified 'up' trend substantially better performance can be obtained than if one simply buys and holds the index. Note though that because there is always a lag between the true start of a trend and the time that the model recognizes the trend is confirmed, it is always possible to lose in the short term and gains are only made through persistent application of the model.

The charts show the daily index value against the left axis and the effective gain in the index while in a model identified 'up' trend on the right. The vertical gray zones show the periods when the index was in a down trend.

Let's consider the Dow Jones chart to understand what the charts represent. Beginning in 2001, the model first recognizes an up trend on 5/11/2001 when the index is at 101820 but then recognizes the trend has turned downward on 8/24/2001 when the index has fallen to 10423. The first red line segment on the chart shows the loss and the right axis shows the effective gain was negative. The model stays out of the market until 8/29/2003 when it detects a new upward trend and this continues until 6/17/2008. This is shown by the second red line segment and the right axis shows the effective gain has gone from -397 to +2742.


The DJI is the least volatile index and the market trend model is consequently very conservative about when to call a change in trend. Note that the model would have kept an investor in cash during most of the 2001-2003 recession and since June 2008.


The trend model is more successful with the S&P 500 keeping an investor out of the market during the whole of the 2001-2003 recession and since January this year.


The trend model when applied to the NASDAQ avoided most of the losses following the dot com crash.


The high volatility of the Russell 2000 causes frequent trend shifts but the model accurately selects the up trends with very few losing periods.

The trend model is very conservative about the overall market and does not detect an upward trend until May 2003. Using this model an investor would have been mostly invested from then until January of 2008.

This Week's Top Tip Tips for getting the most out of our site
New Stock Timing Tool

While the market trend indicators give an overview of the state of different markets, the question naturally arises as to how to which trend signals should be used for trading an individual stock . To answer that question we have developed a new tool that we call the Stock Timeliness Checkup tool. You will find it under the Evaluate menu.

For a limited time this is available to all subscribers and is an excellent reason to take a free trial today.

The tool allows you to compare the performance of any stock against the five market signals over any period up to the last five years.

The initial screen asks for a stock symbol, the dates you want to compare for and the index to compare to.
initial screen

As an example, lets look at Apple over the last three years against the NASDAQ trend signal.

AAPL results

We can see the trades that would have been made by clicking the 'View Model Positions' button.

model positions

Finally, we can try to improve the model results by adding a trailing stop. After experimentation, we find that a trailing stop of 6% gives an improved performance.

You can repeat the process against the other index trends and with varying trailing stops to find the most appropriate scenario for any stocks you own, or are considering owning.

 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD
Dow 9325.01 10.01% -29.7%
NASDAQ 1720.95 10.88% -35.11%
S&P 500 968.75 10.49% -34.03%
Russell 2000 527.78 12.03% -31.1%
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
Russell 2000
12.03 %
Dow Jones
-26.3 %
Russell 2000
-27.28 %
Dow Jones
-29.7 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Cigarettes Long Distance Carriers Long Distance Carriers REIT - Healthcare Facilities
 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. 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 2 18.15 10.02% 7.8%
Last Week 21 0% 0%
13 Weeks 256 21.08 12.87%
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 HOTT Hot Topic Inc 96
Top Technical SINT Si International 23
Top Fundamental DV Devry Inc 38
Top Tech. & Fund. DV Devry Inc 38
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
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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