Weekly Newsletter 02/05/10
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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 markets were initially unimpressed with the latest employment numbers and still fretted over the financial condition of the PIGS (Portugal, Ireland, Greece and Spain) so the slide continued on Friday until mid-afternoon when a massive rally allowed the DJI, S&P 500 and NASDAQ Composite indexes to close with an accumulation day. The reason given for the rally was fear of being short over the weekend if the European Union announced supporting measures, and reasons for optimism in the employment numbers which showed 11,000 manufacturing jobs created in January.

Friday's intraday bottom with a higher close could be considered the first day of a possible rally. We should wait for a follow through day beginning as early as next Wednesday before considering the current slide is over. We anticipated last week that the NASDAQ could correct by 12% to around the 2060 level and that can't be ruled out yet.

NASDAQ Composite

 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
We continue with our analysis of factors that can contribute to breakouts making at least 25% in the six months after breakout.

We showed previously (Newsletter 01/09/2010) that while daily volume at breakout is helpful, it must be at least 2.25 times average daily volume to be a useful factor in selecting a breakout to trade.

We went on to show (01/16/2010 and 01/30/2010) that RS rank values above 92 were very helpful in selecting breakouts that exceeded our target.

This week we look at the contribution of CEF, Rank in Industry and Industry Rank.


Our CEF metric is the result of measuring a stock's performance on eleven measures of fundamental performance to give a maximum possible score of 11points which we normalize on a scale of 1-5. The methodology is described here.

We find an analysis of scatter plots useful in giving a visual presentation of the degree to which there is a relationship between maximum gain after breakout and any one variable. Here is the plot of max gain against CEF score.

Max Gain vs CEF

The orange line is the line of best fit (regression) through the data and we see it intersects our target 25% max gain at about CEF 8.3 (or 5 on our normalized scale used in our watchlists). While the slope of the line shows there is a positive relationship between CEF and max. gain, a statistical analysis shows that the relationship is weak. While it may be tempting to assume that CEF scores greater than 8.3 would help us select breakouts that will meet our target, there are several points to make about this plot.
  1. Our sample is drawn from stocks that have an RS Rank of at least 80 on the day before breakout. They are further filtered by the act of breaking out.
  2. The wide dispersion evident in CEF values for these stocks that have broken out, shows that CEF in itself is a poor selector of the potential to breakout.
  3. The shallow slope of the regression line shows that CEF is of only partial help in selecting stocks after they have broken out.
Next week we will analyze the components of CEF to see if we can isolate the factors that could contribute to CEF being a more helpful predictor of performance after breakout.

Rank in Industry

We rank stocks in their industry group according to their RS Rank on a scale of 0 to 1. Here is the scatter plot of max. gain vs. Rank in Industry.

Max Gain vs Rank in Industry

We see that stocks with a higher Rank In Industry are better represented in our sample, which shows that higher rank in industry makes a stock more likely to breakout. However, the flat regression line shows that there is no relationship between Rank in Industry and performance after breakout. We therefore conclude that Rank in Industry is not useful for selecting stocks to meet our target after breakout.

Industry Rank

We rank industries based on the mean technical score (CET) of stocks within the industry. There are 225 industry groups ranked from 1 (best) to 225 (worst). Here's the scatter plot for max. gain versus Industry Rank.

max gain vs Industry rank

We see that all industry ranks are more or less equally represented in our sample so industry rank is not useful in predicting which stocks are more likely to breakout. Furthermore, we see that the regression line is again flat, so Industry Rank is also not useful in determining likely performance after breakout.

 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Trend
Dow 10012.2 -0.55% -3.99% Up
NASDAQ 2141.12 -0.29% -5.64% Down
S&P 500 1066.18 -0.72% -4.39% Up
Russell 2000 592.98 -1.5% -6.48% Down
Wilshire 5000 11005.5 -0.85% -4.28% Up
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
NASDAQ Composite
-0.29 %
Russell 2000
1.36 %
NASDAQ Composite
7.04 %
Dow Jones
-3.99 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Housewares & Accessories Housewares & Accessories Housewares & Accessories Housewares & Accessories
 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 11.85 7.62% 0.11%
Last Week 17 11.69 4.36% -4.4%
13 Weeks 182 12.23 13.24%
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 CROX CROCS Inc. 107
Top Technical EK Eastman Kodak Co. 107
Top Fundamental UTI Universal Technical Institute Inc. 52
Top Tech. & Fund. UTI Universal Technical Institute Inc. 52
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 CLS Celestica Inc. 68
Top Technical THO Thor Industries Inc. 40
Top Fundamental THO Thor Industries Inc. 40
Top Tech. & Fund. THO Thor Industries Inc. 40
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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