Weekly Newsletter 11/13/09
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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  

This weeks Top Tip contains an important new finding which could help you achieve better trading returns. Don't miss it!

Market is Technically Weak

The major indexes rose again this week but the weak volume levels continued. NASDAQ volume was 15% below the 50 day average while the S&P 500 was 27% below the 50 day average. Some of this lower volume could be explained perhaps by Wednesday's Veterans Day holiday but that couldn't account for all the missing volume. A rising market on lower volume is considered to be technically weak and may indicate that the rally is approaching its end.

There is evidence for this in the NASDAQ (and other charts) where the index has formed a head and shoulders top. The head and shoulders pattern can be bearish if the pattern is completed. Completion occurs when the index drops below the neck line. The neck line is shown on the chart.

NASDAQ Composite

We can see that long before the pattern is completed the index will test the support trend line if the index continues to fall. A fall through the support trend line to pattern completion would be bearish indeed as it would also  undercut the 2024 support level.

A technically weak market affects the number and strength of breakouts. A condition for most breakouts (except from a High Tight Flag pattern) is that volume should be at least 50% above the 50 day average. This requirement means that we issue far fewer breakout alerts but also ensures that we are less tempted to trade. This conserves our capital in an unfavorable market.

 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

Which Breakouts Give the Best Return?

There are often many stocks on our watchlists that meet the chart pattern, technical and fundamental criteria that we apply, but which ones should you focus on? We attempt to answer that today.

As every trader knows, stock picking is a percentage game. You will not pick winners 100% of the time, or possibly even 50% of the time, so you want to get the best possible return out of the winners that you do pick. (It is also important to minimize your losses through effective portfolio management but that is not the topic we are interested in today).

Every long position watchlist on our main site, breakoutwatch.com, has a backtest feature that allows you test various technical and fundamental conditions to see which ones are performing best over a recent time frame, up to one year. This allows you to fine tune the criteria you look for in a breakout to recent market conditions. The backtest tool requires that you test sets of filter conditions one at a time, but we also have a tool that allows us to simulate over many filter sets so we can analyze which ones work best. Its a resource hog so we don't make it publicly available but from time to time we run it and publish the results here. We published the results last in our August 1 newsletter. The results showed that choosing stocks with a minimum RS Rank of 91 and a minimum daily volume of 40k shares would improve your returns over all breakouts by 22%. Other factors were insignificant in selecting the best performing breakouts.

To see if current conditions have changed the outcome, we ran the simulation again on Friday, November 13 for the last 90 days. This time the results surprised us because we have never before found that using fundamental score as a filter criteria was beneficial*. Although the filters found in August still performed very well we found that adding a filter on fundamental score improved the return by another 50%.

Here are the results using the August filters:

Filter settings: RS Rank >= 91;BoV>=40k
backtest results

Now, we find that adding a minimum fundamental score of 4 to the selection filter improves the return over all breakouts by 90%:

Filter settings: RS Rank >= 91;BoV>=40k; FS>=4
backtest results

Using these filters would have found just seven confirmed breakouts in the last 90 days but this may be sufficient, depending on your trading style. The stocks that met the filter criteria and their performance is also available in our backtest software. They are:

Filter settings: RS Rank >= 91;BoV>=40k; FS>=4
backtest results

Note that the older breakouts have made the biggest gains, so far. There is still time for the newer breakouts to make equally strong gains.

* This always seems surprising to CAN SLIM investors but we have always found that RS Rank and technical strength was most important in predicting future performance. The reason was that stocks with high fundamentals had already achieved a positive valuation and had less upside potential. Recent market conditions have changed that equation because all stocks were beaten down and investors and traders are now looking for security and have preferred stocks with strong fundamentals. Hence they have risen most.
 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Trend
Dow 10249.9 2.26% 16.79% Down
NASDAQ 2160.67 2.28% 37.01% Up
S&P 500 1090.91 2.02% 20.78% Up
Russell 2000 580.7 0.06% 16.27% Down
Wilshire 5000 11169.2 1.86% 22.91% Up
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
NASDAQ Composite
2.28 %
Dow Jones
8.82 %
NASDAQ Composite
28.6 %
NASDAQ Composite
37.01 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Publishing - Newspapers Publishing - Newspapers Copper Auto Dealerships
 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 7 10.31 5.51% 2.06%
Last Week 6 10.38 14.2% 10.15%
13 Weeks 147 10.92 16.81%
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
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 ANIK Anika Therapeutics Inc 78
Top Technical ANIK Anika Therapeutics Inc 78
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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