|Weekly Newsletter 12/12/09|
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For new readers, we recall that we focus on the NASDAQ Composite in our weekly remarks because it is stocks listed on that exchange that deliver the best breakout performance.
Although the primary trend continues to be upwards, it is clear that the trend has weakened considerably since the last mini-rally in November. The NASDAQ Composite is again showing signs of weakness with the possibility that a head and shoulders pattern is developing. The chart shows the head and left shoulder and the right shoulder (not shown) may have been set by the intraday high on Thursday of this week. If so, then the neckline will be as shown. It will take a couple or so sessions to confirm the right shoulder but by then the neckline may have been broken which would confirm the pattern. Completed head and shoulders patterns are generally bearish, so if completed we could see the current consolidation pattern turn into a correction. This would be confirmed with a break of the 50 dma line and a failure of support at 2114.
The chart also shows how average volume has declined since November as daily volume has been below average everyday, with only one exception on December 4. Although low volume is considered a sign of a technically weak market, the lack of volume makes it difficult to assess the strength of a move in either direction.
|New Features this Week||Additional Value that we added this week|
Our Zacks Strong Buy backtest data has been updated with the latest available data from Zacks. The data is now current through November 13, 2009.
|This Week's Top Tip||Tips for getting the most out of our site|
A winning strategy: HTF breakouts and Zacks Strong Buy (ZSB)
Back in May, we introduced a new watchlist based on stocks that have a "Strong Buy" rating from Zacks Investment Research. Backtesting a strategy of buying breakouts from our cup-with-handle watchlist as they broke out and then selling when they lost their Zacks "Strong Buy" ranking showed very impressive returns of over 1000% since 2003. We wrote about this strategy in detail in our white paper "Earnings Revisions and Cup-with-Handle Breakouts: A Rewarding Combination".
Since the introduction of the strategy, we have been somewhat disappointed in the performance of ZSB breakouts from the cup-with-handle pattern. In fact, they have generally performed poorly showing a "pop" on breakout day but poor performance thereafter. In contrast, ZSB breakouts from the High Tight Flag (HTF) pattern have done extremely well, provided a tight stop loss strategy was followed.
As we know, volatility was high for much of the year as nervous traders and investors were quick to open positions for fear of missing the new bull market but were quick to close their positions for fear of being caught by a failed bear market rally. In this volatile market, the use of tight stops was essential to turn a profit. We can demonstrate this with the help of or ZSB backtest tool.
Chart1 shows the results of applying our ZSB strategy to HTF breakouts this year using a stop loss of 3% from the buy price as recommended in our white paper. No trailing stop was used. The chart shows that the strategy beat the S&P 500 by a factor of over 3.
Chart 1: HTF ZSB Breakouts 2009 - No Trailing Stop
Notice that results are marked by strong gains followed by steep losses, in several cases giving up all or most of the gains made. This implies that we need a trailing stop to limit our losses. (A trailing stop is one which closes a position when the stock falls by the trailing stop % from the previous high). Using a trailing stop of 5% would have substantially improved our performance as the next chart shows.
Chart 2: HTF ZSB Breakouts 2009 - 5% Trailing Stop
The next table shows in more detail how the strategy would have performed. Note that the overall return was 107% compared to the S&P 500's return year-to-date of 17%. With any trading strategy, it is important to limit your drawdown. In this case the drawdown was just 7.6%.
These are historical returns, of course, and there is no guarantee that the results will be similar in future. Nevertheless, the use of backtesting tools can give valuable insights. Our backtesting tools (for both the ZSB watchlist and our other watchlists) allow you to test what has worked in the market recently and allow you to detect when strategies that once worked well, are no longer performing.
Our Zacks Strong Buy backtest tool is available to everyone to try at http://www.breakoutwatch.com/zacks/strategyTest.php. The results presented here for 2009 are not even the best that could have been obtained. Try the backtest tool yourself and see if you can do better!
|Market Summary||Overview of market direction and industry rotation|
|Weekly Breakout Report||How confirmed breakouts performed this week|
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|
|Top Second Chances||Stocks that broke out this week and are still in buyable range|
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