Weekly Newsletter 02/12/10
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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  
Our commentary is even shorter than usual this week as we are traveling to Ohahu for a soccer tournament with our boys.

NASDAQ Composite

Last Friday was the first day of a rally attempt by the NASDAQ and on the fifth day, Thursday, we had a weak accumulation day, followed by another weak accumulation day on Friday. We say weak, because Thursday's volume was slightly below the 50 day average and Friday's only slightly above it.

The rally is likely to remain questionable until there is a resolution of the Greece debt problem and confidence returns that China can become the engine of world recovery.
 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

This week we complete our analysis of factors that can contribute to breakouts making at least 25% in the six months after breakout. When the analysis is finished, we will see that we have a viable system for achieving, even exceeding, our objective!

The story so far....
  • 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.
  • Last week, we showed that fundamentals, as measured by our CEF metric, could further improve our results, although only marginally.
Now we look into the components of our CEF metric to see which ones are responsible for the minor improvement observed last week.

CEF Metric Components

Firstly we recall that our CEF metric is calculated from an evaluation of 11 different measures of fundamental performance. Each of these is given a score in the range 0 - 1 calculated by prorating between the best possible performance and a minimum acceptable level of performance as shown in this table.

Performance Measured
Requirement for Max. Score
Cut-off for Minimum Score
Max Score
1 Quarter over Quarter Earnings Growth Rates 2 Q's, each >= 18% 2 Q’s, each < 0% 1
2 Positive Quarterly Earnings 2 Q’s, each  > 0 2 Q’s, each < 0 1
3 Quarterly Earnings Growth Rate Acceleration 4 Q’s, each  > last 4 Q’s, each  < last 1
4 Year over Year Earnings Growth Rates 4 FY’s, each >= 25% 4 FY’s, each < 0% 1
5 Quarter over Quarter Sales Growth Rates 2 Q’s, each  >= 25% 2 quarters, each < 0% 1
6 Quarterly Sales Growth Rate Acceleration 4 Q’s, each > last 4 quarters, each < last 1
7 Forward Earnings Growth Rates >= 15% & > current Q < 15% 1
8 Institutional Ownership >= 5 holders &
>= 0 net shares purchased
< 1 holder &
< 0 net shares purchased
9 Return on Equity >= 17% < 0% 1
10 Cash Flow (cflo)
cflo >= 120% earnings &
cflo MRQ > 0 &
cflo TTM > 0
cflo < 120% earnings &
cflo MRQ < 0 &
cflo TTM < 0
11 Net Margins Most recent FY max over last 3 FY’s Most recent FY min over last 3 FY’s 1

In previous weeks we have first presented a scatter plot of maximum gain after breakout against the variable we were measuring because a scatter plot gives a good visual representation of any potential relationship. We won't clutter the newsletter with those plots this week, because every one of the possible 11 scatter plots showed no perceivable correlation with performance after breakout.

However, we knew from last week that there is a meaningful relationship between CEF and performance after breakout so we ran a stepwise multiple regression using max. gain as the dependant variable. The multiple regression showed that only two CEF components were of any significance: CEF2 and CEF3, positive quarterly earnings (CEF2) and Quarterly Earnings Growth Rate Acceleration (CEF3). This result confirms that of all fundamental measures of performance, recent quarterly earnings is the most important factor in driving price upwards after breakout. This also explains why our Zacks strategy, based on earnings surprises, is successful.

Now, we will add a filter using CEF2 and CEF3 to our RS Rank filter and look at a scatter plot. We'll quickly cut to the chase and say that we found values equal to or higher than 0.6 gave the best results.

maxGain vs RS and CEF2 & CEF3

The regression line shows the expected value if max. gain is above 25%. In fact, the average max. gain is 29.6%. This is for stocks that had a volume of 1.5 times average daily volume on the day of breakout. For our sample since 2004, there were 624 stocks that met these criteria.

If we now add an additional filter for breakout day volume equal to or greater than 2.25 times average daily volume, we increase our average maximum gain to 33.4%. Since 2004, there were 345 breakouts in this group, an average of 57 per year.

maxGain vs RS & CEF2 & CEF3 & adv

While the additional volume filter gives a substantial improvement in average maximum gain, it is difficult to use in real life. While we can buy as soon as a stock reaches its breakout price if it has the necessary RS, CEF2 and CEF3 value, we cannot know what the volume for that day will be until the end of the session.


We can now summarize our rules for buying breakouts from our Cup with Handle watchlist which offer the best chances of achieving an average return above 25%.

  1. Before the market opens, identify stocks on our CwH watchlist with an RS Rank of 92 or better (you can set a filter to select these for you)
  2. Check the CANTATA Evaluator for these stocks and select those with CEF2 >= 0.6 and CEF3 >= 0.6.
  3. Buy any of these stocks if we issue a breakout alert on them as close to the alert price as possible.
  4. Set a hard sell stop 8% below the alert price immediately after purchase.
In the coming week, we'll develop a method for flagging stocks on the CwH watchlist that meet these criteria.

Once you've bought a stock, when should you sell it? We'll look at that in forthcoming issues of the newsletter.

 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Trend
Dow 10099.1 0.87% -3.15% Up
NASDAQ 2183.53 1.98% -3.77% Down
S&P 500 1075.51 0.88% -3.55% Up
Russell 2000 610.72 2.99% -3.68% Down
Wilshire 5000 11151.7 1.33% -3.01% Up
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
Russell 2000
2.99 %
Russell 2000
1.06 %
NASDAQ Composite
9.97 %
Wilshire 5000
-3.01 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Major Airlines 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 13 12 4.66% 3.08%
Last Week 15 11.85 3.06% -1.39%
13 Weeks 187 12.54 12.79%
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 CKSW ClickSoftware Technologies Ltd. 111
Top Technical ADG Allied Defense Group Inc. 92
Top Fundamental NFLX Netflix, Inc. 49
Top Tech. & Fund. NFLX Netflix, Inc. 49
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 LENB LENNAR CORP CL B ( 66
Top Technical NDN 99 Cents Only Stores 54
Top Fundamental CMG Chipotle Mexican Grill, Inc. 25
Top Tech. & Fund. CMG Chipotle Mexican Grill, Inc. 25
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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