Weekly Newsletter 11/06/09
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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  
Three weeks ago, I analyzed the performance of the NASDAQ Composite against our Bollinger Band chart* (see Newsletter 10/16/09). I cautioned that the index was in correction and opening any new positions should be avoided until the index had recovered above its 50 day moving average. In that article I drew attention to the pattern that had emerged since March wherein the NASDAQ rebounds quite quickly from the lower band and then resumes an upward leg that can be several weeks long before consolidation begins again.

This chart shows that the rebound from the lower band has begun and the index has also moved above the 50 dma. If the previous pattern repeats itself then we could see a gain of around 100 points (5%) in the index from here.

NASDAQ Composite

Although a short term gain in the index seems likely, we need some volume before we can expect any quantity of breakout candidates. Even though the index has risen quite strongly in three out of the last four sessions, volume has been noticeably weak, as the chart shows.

The decline in volume has greatly reduced the number of breakout candidates with just four breakout attempts being successful this week. Two of these were highly successful: DEER broke out from a High Tight Flag to make an intraday gain of 22.7% although profit taking reduced the gain to 8.6% by Friday's Close; ECPG broke out from a cup-with-handle base to gain 13.5% by Friday's close. ECPG first appeared on our watchlists this year as a high tight flag on May 19, although it never met our breakout criteria (handle became too long). Since March 9, this stock has gained 576%!

Why is volume so low? We can't be sure but the implication is that institutions, which have the most power to move the markets are not engaged. In turn, institutions, particularly mutual funds and ETF's, get their funds from private investors, but we know that there is around $3.5 trillion in cash sitting on the sidelines. When the private investor finally gains confidence in the recovery, we can expect the bull market to return in earnest.

* Our BB charts are slightly unusual in that we show both the 1 and 2 standard deviation bands.
 New Features this Week Additional Value that we added this week
We launched a companion site this week which we are calling 'essential.breakoutwatch.com'. The goal of the site is to present a simpler version of breakoutwatch.com at a lower price point. The data available is more restricted and sits somewhere between our Bronze and Silver subscription levels.

We intend to make this new site available to all Silver level subscribers and above and should have that completed by next weekend.

There is a special introductory offer of $9.95 to the new site until November 30, 2009.

This Week's Top Tip Tips for getting the most out of our site
Using Bollinger Band 'Bands' to Detect Trend Reversals and Sell Signals

In our weekly commentary we remarked that our Bollinger Band charts are slightly different from usual in that we show both the 1 and 2 standard deviation bands rather than just the 2 SD band. We do this because the two bands working together can confirm trend changes.

To illustrate how the BB Bands can serve to confirm trend changes, here's an example of Imperial Oil (IMO) the top ranked stock in the top ranked Oil and Gas Canadian group that has performed well in 2005.

  • Trend A shows the stock tracking between the lower two bands with a possible change in trend signaled as it crosses the inner band to the upside. This is labeled 'Buy Alert'.
  • Trend B begins when the stock crosses out of the inner band to the outer band. This is labeled 'Buy Confirm'.
  • Trend B continues until the stock closes within the inner band for the first time. This is labeled 'Sell Alert'.
  • The stock now consolidates in area C. Notice that it never closes below the lower inner trend line but re-crosses the upper inner trend line at which point the sell alert is canceled.
  • The stock now walks up the outer band until another Sell Alert is issued at the start of area E.
  • Another period of consolidation begins (E) and the Sell Alert is canceled as the consolidation is completed and the stock moves out of the inner-band to the upside.
  • Trend F now begins as the stock again walks up the outer band. A brief Sell Alert is issued in late September which is canceled the following day (not shown). Another Sell Alert is issued on October 4 and confirmed on October 5 as the stock closes below the lower inner band.

The strategy shown is a conservative one where a confirmation is required before the buy or sell alert is confirmed. A riskier strategy is to buy or sell on the initial alert but in that case it is desirable to have confirmation from other non-correlated indicators such as the RSI (or MACD) and On Balance Volume. (Note that the RSI and MACD should not be used together as they are both derived from closing price data alone). Using the BB Bands in conjunction with these indicators can help us determine when to sell a breakout that we might be holding. Here's an example of a recent breakout (9/16) that rose 53.5% in twelve sessions.

Following breakout the stock walked up the outer band but a sell signal was given on 10/5 when the stock closed within the inner band. This sell signal was confirmed on the same date as the RSI dropped below the overbought line and the On Balance Volume (OBV) was clearly in decline.

(This was adapted from our newsletter of 10/15/05)

 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Trend
Dow 10023.4 3.2% 14.21% Down
NASDAQ 2112.44 3.29% 33.95% Up
S&P 500 1069.3 3.2% 18.38% Up
Russell 2000 580.35 3.12% 16.2% Down
Wilshire 5000 10965.4 3.26% 20.67% Up
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
NASDAQ Composite
3.29 %
Dow Jones
5.61 %
NASDAQ Composite
21.47 %
NASDAQ Composite
33.95 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Silver Publishing - Newspapers Copper Auto Dealerships
 Most Improved Industry (by change in technical rank2)
Aluminum
+ 54
Aluminum
+ 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
10.38 10.72% 5.67%
Last Week 6 11.15 -2.38% -6.38%
13 Weeks 143 11.54 16.47%
-1.82%
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
Category
Symbol
Company Name
Expected Gain1
Best Overall WMG Warner Music Group Corp 98
Top Technical ELRN Elron Electronic Ind Ltd 84
Top Fundamental LFT LONGTOP FINL TEC ADS 39
Top Tech. & Fund. LFT LONGTOP FINL TEC ADS 39
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
Category
Symbol
Company Name
Expected Gain1
Best Overall ITWO i2 Technologies Inc 59
Top Technical ITWO i2 Technologies Inc 59
Top Fundamental ITWO i2 Technologies Inc 59
Top Tech. & Fund. ITWO i2 Technologies Inc 59
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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