Weekly Newsletter 08/14/09
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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  

The major indexes ended a run of four straight weeks of gains with across the board losses this week. There is increasing concern that the recent rally has put stock valuations ahead of where they should be in relationship to the economic recovery and that a correction is necessary. These worries tend to be self-fulfilling so we see a period of consolidation and possibly correction ahead.

Even during periods of correction there are still stocks that go counter to the prevailing trend although they tend to be fewer and less frequent. As the analysis in our Top Tip this week shows, even while the markets were falling in 2008 there were still a sizeable number of stocks breaking out and making excellent gains. The analysis shows that stocks with good technical strength will significantly outperform those with sound fundamentals, so watch for potential breakouts with strong technicals, particularly RS rank.

 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
CE Zones, Strength Rankings and their Significance

When we introduced our new watchlist formats, we also introduced a new technical and fundamental strength ranking scheme. These were based on our CET and CEF metrics with the idea to convert both metrics to a 1-5 scale of strength with 5 being strongest. This seemed like a good idea at the time but it has also introduced some confusion that we would like to clear up.

First, let me explain the origin of the terms CET and CEF. When we started our site in 2001, we developed a tool we called the CANSLIM Evaluator (CE) which was designed to use the CAN SLIM® method to rate stocks on both technical (CET) and fundamental (CEF) strength. We found there were 7 points that could be earned for technical merit and 11 points that could be earned for fundamental strength so our CET score could range from 1 - 7 and our CEF score from 1 - 11. In 2007 we were forced to abandon the CANSLIM term and instead renamed the CE to CANTATA Evaluator standing for Current and Annual Earnings, Technical Analysis and Timing Assistance. This name change meant we could still use CET and CEF to refer to our technical and fundamental scoring scheme.

Recognizing that the scoring schemes were a little hard to grasp, from the  beginning we introduced a scheme to convert the CET and CEF scores to zones as shown:

CE Zones old

The zones under this scheme were labeled CET- CEF so a 4-4 zone was actually a CET  >= 5.25 and a CEF >= 8.25. We still use the zone notation in our email alerts and performance reports. Note that where we don't have fundamental data for a stock it gets an "n/a" whereas we always have technical data for a stock. Hence we never have 0-n zones but we do have 1-n zones.

When we introduced the new watchlist format we converted our zones to new technical and fundamental strength scales from 1-5. The equivalence to the zone notation is shown here:

CE Zones new

How should you use these Zones?

It may come as a surprise to CANSLIM followers to learn that fundamental strength is not an important factor in determining performance after breakout. Here is an analysis of how well breakouts from our cup-with-handle watchlist (the best performing watchlist overall)  performed since January 2008. This analysis is taken from our published performance data under the  Monitor > Performance menu choice.

Breakouts Gaining at Least 5% since January 2008
Zone No. of Breakouts Avg. % Gain % of Breakouts
3-3 34 33.0 6%
4-3 360 27.6 60%
4-0 24 23.7 4%
4-4 34 23.4 6%
4-2 127 22.2 21%
3-2 16 19.7 3%
4-1 6 14.0 1%

As you can see, zone 4-4, the zone with strongest fundamental strength, produced only 4% of all successful breakouts (defined as breakouts gaining over 5% after breakout). Note that the best gains was from zone 3-3 but this accounted for only 6% of successful breakouts.

What we suggest, therefore, is that you focus on alerts for breakouts with a zone of 4-3 and 4-2 which will select 81% of successful breakouts.
 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Trend
Dow 9321.4 -0.52% 6.21% Down
NASDAQ 1985.52 -0.74% 25.9% Up
S&P 500 1004.09 -0.63% 11.16% Up
Russell 2000 563.9 -1.48% 12.9% Up
Wilshire 5000 10333.3 -0.8% 13.71% Up
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
Dow Jones
-0.52 %
Russell 2000
18.18 %
NASDAQ Composite
29.4 %
NASDAQ Composite
25.9 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Auto Dealerships Auto Dealerships Auto Parts Stores Auto Parts Stores
 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 4 14.46 5.38% 1.33%
Last Week 19 14.77 16.63% 7.49%
13 Weeks 186 15.38 24.62%
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 RT RUBY TUESDAY INC 115
Top Technical CKEC Carmike Cinemas 92
Top Fundamental NFLX Netflix Inc 48
Top Tech. & Fund. NFLX Netflix Inc 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 EGO El Dorado Gold Corp 90
Top Technical POWI Power Integrations Inc 47
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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