Weekly Newsletter 12/12/09
Login   Trial   Guest
You are receiving this email because you are or were a BreakoutWatch.com subscriber, or have subscribed to our weekly newsletter. This newsletter summarizes the breakout events of the week and provides additional guidance that does not fit into our daily format. It is published each weekend.
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  
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.

NASDAQ Composite

 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.

HTF ZSB 2009 #1
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.
HTF ZSB Breakouts 2
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%.

Detailed Results

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
Index Value Change Week Change YTD Trend
Dow 10471.5 0.8% 19.31% Up
NASDAQ 2190.31 -0.18% 38.89% Up
S&P 500 1106.41 0.04% 22.49% Up
Russell 2000 600.37 -0.4% 20.21% Up
Wilshire 5000 11344.4 0.05% 24.84% Up
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
Dow Jones
0.8 %
Dow Jones
9.02 %
Dow Jones
19 %
NASDAQ Composite
38.89 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Silver Silver Silver Copper
 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 5 9.92 10.47% 4.78%
Last Week 14 10.77 10.62% 4.19%
13 Weeks 136 11.08 14.37%
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 SFN Spherion Corporation 104
Top Technical GMK Gruma Sa De Cv Ads 88
Top Fundamental CHBT China-Biotics, Inc. 64
Top Tech. & Fund. STAR Starent Networks 26
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 GPOR Gulfport Energy Corp 77
Top Technical GPOR Gulfport Energy Corp 77
Top Fundamental CRNT Ceragon Networks Ltd 61
Top Tech. & Fund. CRNT Ceragon Networks Ltd 61
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.

If you received this newsletter from a friend and you would like to receive it regularly please go to the BreakoutWatch.com site and enter as a Guest. You will then be able to register to receive the newsletter.

Copyright © 2009 NBIcharts, LLC dba BreakoutWatch.com. All rights reserved.
" BreakoutWatch," the BreakoutWatch.com "eye" logo, and the slogan "tomorrow's breakouts today" are service marks of NBIcharts LLC. All other marks are the property of their respective owners, and are used for descriptive purposes only.

BreakoutWatch is not affiliated with Investor's Business Daily or with Mr. William O'Neil. Our site, research and analysis is supported entirely by subscription and is free from advertising.

To unsubscribe from further breakoutwatch.com newsletters, please click here.