Weekly Newsletter 05/21/10
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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  
Intraday-Reversal: A Short Term Bottom?

In volatile trading, the markets reversed at least twice on Friday to deliver gains of over 1% for each of the major indexes and accumulation days for the DJI and S&P 500. An intraday reversal is considered a possible signal of a market bottom so we may see the bounce continuing into next week. Another positive sign is that the index closed above its 200 day average.

IXIC Intraday

The day's low occurred shortly after the open and coincided closely with the May 6 Flash Crash low.


The sharp fall and quick recovery that day was almost certainly the result of a program trading feedback loop so today's sharp recovery from that day's low may also be the result of program trading. If so, it shows how difficult it is for the retail investor, not glued to their monitor, to play in this market. Our CwH backtest simulator (more below) shows that when our market trend signal is down, which it currently is for the NASDAQ and Russell 2000, it is best not to enter any new positions.

Volatility has been pronounced lately due to the European debt situation and also uncertainty about financial regulation at home. Although not resolved, the European situation has possibly stabilized now that the German parliament has endorsed the bailout package. Additionally, although the Senate and House finance bills have to reconciled, the broad outlines of the new regulatory environment are now known (see this NY Times article for a useful summary of what's in the legislation - too bad reinstatement of Glass-Steagall was not included).

Against this background, the short term outlook is for reduced volatility and a recovery from the present oversold condition but as long as the debt problem overhangs Europe and the US, which is likely to be for a long time to come, the long term trend may be downwards.
 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
Optimum Hold Days for Cup-with-Handle Breakouts

Last week we discussed the optimum target gain % for cup-with-handle breakouts. By optimum target % we meant at level should we take profits and move on to our next breakout opportunity. If we take profits too soon, we miss out on some extra gains but if we get too greedy and hold out for more gain, we pay an opportunity cost because we missed buying a better performing breakout. You will recall that our conclusion was that the optimum target % was 25%. This was assuming that we selected breakouts which met our target criteria (see Factors Affecting Performance After Breakout).

The question we answer this week is "how long should I hold onto a breakout before taking profits?".

This question arises because just as holding on for a higher percentage gain can create an opportunity cost, so can holding on too long. Clearly, the gain a stock will make is related to how long we hold it, so we need to find the optimum combination of hold days and target %.

To find this sweet spot we ran our simulation for hold periods from 10 to 360 days in 10 day increments and target gains of 10% to 75%. Other parameters were held constant. Our complete set of parameters were:
test parameters

The results surprised us!

We found that the optimum hold days was just 20 and the optimum target gain% had moved up to 55% with a compound gain of over 1600% (compared to over 900% with a 180 day hold and 25% target).

Here is the strategy output as of Friday, May 21, 2010.

20 Hold Days Results

This also proves to be a very low risk strategy. The detailed results show that the maximum drawdown was only 4.4%. So at no time during the 4 1/2 years of the strategy backtest had we lost more than 4.4% of our portfolio value and this was during one of the most extreme bear markets in memory. We we've highlighted the important statistics in the table of results.



We can now state our recommended cup-with-handle strategy:

  • Buy stocks that meet our target criteria (see below) when breaking out on at least 3 times average daily volume as close to the breakout price as possible (use our alerts for this).
  • Sell them immediately:
    • they fall to 8% below their breakout price, or
    • they fall 11% from their most recent high, or
    • they have gained at least 55% above their breakout price, or
    • you've held the position for 20 sessions
  • Stocks that meet our target criteria get the thumbs up (MTC) on our watchlists and alerts.

Backtest Data Considerations

Our backtest database for the simulation contains 19,000 data points of stocks that were on our CwH watchlist since December, 2004. This is a very sizable sample and covers a highly volatile period for the markets. The results of any backtest run over this database are highly susceptible to the sequence in which the data appears and the period over which compounding occurs. This can be seen by varying the periods over which the backtest is run. Because the sequence in which the breakouts occur in the historical data base and the market conditions under which each breakout occurred is unlikely to be exactly repeated in the future, the backtest results only indicate what would have happened if the selected strategy had been followed over the time period of the simulation, and cannot predict how the tested strategy is likely to perform in the future. Nevertheless, because of the size of the database, the simulation offers a valuable opportunity to test strategies over a set of very diverse conditions, both favorable and highly unfavorable to the retail investor.


 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Trend
Dow 10193.4 -4.02% -2.25% Up
NASDAQ 2229.04 -5.02% -1.77% Down
S&P 500 1087.69 -4.23% -2.46% Up
Russell 2000 649.29 -6.44% 2.4% Down
Wilshire 5000 11338.8 -4.53% -1.38% Up
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
Dow Jones
-4.02 %
Russell 2000
2.8 %
Russell 2000
11.05 %
Russell 2000
2.4 %
 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 4 17.15 10.07% -2.4%
Last Week 8 17.62 8.12% -6.17%
13 Weeks 238 17.92 19.06%
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 NOVL Novell Inc. 105
Top Technical NGA North American Galvanizing & Coatings Inc. 71
Top Fundamental MELI Mercadolibre, Inc. 52
Top Tech. & Fund. MELI Mercadolibre, 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 ml PUBLIC "-//W3C//DTD HTML 4.01//EN" "http://www.
Top Technical ml PUBLIC "-//W3C//DTD HTML 4.01//EN" "http://www.
Top Fundamental ml PUBLIC "-//W3C//DTD HTML 4.01//EN" "http://www.
Top Tech. & Fund. ml PUBLIC "-//W3C//DTD HTML 4.01//EN" "http://www.
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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