Weekly Newsletter 05/14/10
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  

We anticipated last week that our market trend signal for the NASDAQ would turn down and that occurred on Friday when the index suffered its second successive distribution day.

Although the major indexes all closed higher for the week, the markets are rattled by doubts that the European bailout will solve the Euro-zone's problems in the long term, multiple investigations by Federal agencies and and NY State of the major Wall Street firms and disappointing forecasts from tech. leader CISCO and graphics chip supplier NVIDIA. While the domestic economic situation continues to improve, with better than expected retail sales and industrial production reports for April, there are real and justified fears that the recovery will continue to be slow and is threatened by the European situation and increasing levels of debt both there and at home.

Two links on Barry Ritholz's blog caught our attention today. If you have time over the weekend, have a look at these links - they will not cheer you up, but they do represent a sanguine view of the challenges facing the US and Europe.

Nassim Taleb on the mini-Crash

Victor Sperandeo on the European Bailout:

click for audio

 New Features this Week Additional Value that we added this week
See next item
This Week's Top Tip Tips for getting the most out of our site

New Backtest Data shows Importance of Letting Winners Run and Cutting Losses

We know this to be true, but how often do we fail to do it because we lack the discipline to enforce it?

At the request of a subscriber, we have added a 'Target Gain %' to our CwH Strategy Backtest tool and as we shall see, it clearly shows that letting winners run while employing a rigid stop loss strategy pays off handsomely.

Firstly, we recall that we have previously shown (Factors Affecting Performance After Breakout) that the most successful breakouts from a cup-with-handle pattern have these characteristics:

  • minimum RS Rank of 92
  • CEF2 and CEF3 values of at least 0.6 (these metrics measure recent earnings)
  • minimum breakout day volume of three times average volume
  • other factors such as industry rank, rank in industry and other fundamentals are of little significance.

We have also found (Newsletter 3/12/10) that the money management technique of selling if the stock falls by 8% from the breakout price and taking profits with a trailing stop of 13%, optimizes returns when backtested over the last 5 years).

Our new parameter allows us to determine the optimum target percentage gain.

Using our previously determined values we ran the backtest for target gains of 10 - 75% with a portfolio size of four stocks. Here are the results:

Target Gain Stop Loss Trail Stop Adv Ratio Initial Portfolio Value Final Portfolio Value Gain/Loss %
10 8 11 3 10000 97,201.82 872.02
15 8 11 3 10000 102,420.18 924.2
20 8 11 3 10000 81,316.49 713.16
25 8 11 3 10000 107,243.95 972.44
30 8 11 3 10000 99,005.29 890.05
35 8 11 3 10000 65,408.52 554.09
40 8 11 3 10000 63,118.53 531.19
45 8 11 3 10000 60,303.23 503.03
50 8 11 3 10000 56,629.12 466.29
55 8 11 3 10000 56,411.38 464.11
60 8 11 3 10000 57,680.41 476.8
65 8 11 3 10000 58,962.42 489.62
70 8 11 3 10000 57,344.49 473.44
75 8 11 3 10000 49,120.19 391.2

So we see that the optimum target gain is 25%. If we take profits then we free-up cash to buy our next potential winner. If we hang on for a bigger profit, we are either going to get taken out of the position by our trailing stop for less than our 25% gain, or we are missing an opportunity to make a more profitable trade.

Here are the screen shots for the simulation. You can try it yourself at http://www.breakoutwatch.com/Mike/cwhStrategyTest.php

 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Trend
Dow 10620.2 2.31% 1.84% Up
NASDAQ 2346.85 3.58% 3.42% Down
S&P 500 1135.68 2.23% 1.85% Up
Russell 2000 693.98 6.28% 9.45% Up
Wilshire 5000 11876.3 2.74% 3.29% Up
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
Russell 2000
6.28 %
Russell 2000
13.63 %
Russell 2000
19.51 %
Russell 2000
9.45 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Toy & Hobby Stores Toy & Hobby Stores Home Furnishing Stores 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 8 17.62 7.27% 1.28%
Last Week 8 17.69 15.87% 8.31%
13 Weeks 235 18.31 20.36%
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 HL Hecla Mining Co. 109
Top Technical SWWC Southwest Water Co. 55
Top Fundamental SHFL Shuffle Master Inc. 80
Top Tech. & Fund. AMD Advanced Micro Devices Inc. 88
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 SUMR Summer Infant, Inc. 100
Top Technical SUMR Summer Infant, Inc. 100
Top Fundamental SUMR Summer Infant, Inc. 100
Top Tech. & Fund. SUMR Summer Infant, Inc. 100
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 © 2010 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.