Weekly Newsletter 12/03/10
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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 NASDAQ Composite broke out of the symmetrical triangle we discussed last week and has now formed an ascending triangle. This is usually a bullish pattern, particularly when the underlying trend is well established. Our trend model for the NASDAQ has been positive since  early September so we can be confident that this is the case.  Consequently, we consider that there is a high probability that the NASDAQ Composite will break through resistance in the near future to set a new post-crash high.

NASDAQ Composite

While Friday's unemployment data was deeply disappointing, other economic indicators show that the economy is recovering, albeit slowly. The ISM non-manufacturing index, which covers 90% of the economy continues to improve; Spain and Portugal were able to sell some bonds at not too dramatic interest rates; China continues to be the engine which is pulling the world out of recession, and surprise, surprise, pending home sales jumped up by 10%.

The number of breakouts this week jumped up to 20. This is short of the 13 week average, but pretty good considering the first two days of the week produced distribution days for the NASDAQ.

All in all, conditions seem to be pretty favorable for further short term gains.

 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
Buy at Open Strategy

We were asked if the use of buy stops is useful when it is not possible to monitor the market intra-day.

While this is possible, it is not a strategy we recommend for a couple of reasons.

1. We know that the likelihood of significant gains after breakout is increased if the volume is well above the daily average. A buy stop is triggered when the stop price is met regardless of volume, so you may end up buying a stock that is not a strong candidate for future gains.

2. The number of orders you place cannot exceed your available account balance if they were all to be executed. This makes position sizing and portfolio management less than optimum.

An alternative is to review the days breakouts after the close and select those that have shown significant volume on breakout. You can then place a market order which will be executed at the open of the next session.

In this case you will usually pay a premium above the breakout price. Backtesting using our cup-with-handle backtesting tool shows that on average this premium is of the order of 2.6%. Since this has already eroded your potential gain on the stock, it is prudent to tighten your buy stop and trailing stop percentages. Instead of using the 8% buy stop and trailing stop we have suggested for the buy on breakout strategy, we suggest you use 6% buy and trailing stops when placing a market order to buy at open.

If you run our backtest using the CwH with MTC strategy using these values, you would have had an ROI of 57% over the last year (12/3/2009 - 12/2/2010).

You can run our CwH backtest 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 11382.1 2.62% 9.15% Up
NASDAQ 2591.46 2.24% 14.2% Up
S&P 500 1224.71 2.97% 9.83% Up
Russell 2000 756.42 3.23% 19.3% Up
Wilshire 5000 12931 2.95% 12.47% Up
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
Russell 2000
3.23 %
Russell 2000
17.57 %
Russell 2000
19.31 %
Russell 2000
19.3 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Silver Silver Silver Beverages - Brewers
 Most Improved Industry (by change in technical rank2)
Toy & Hobby Stores
+ 116
Toy & Hobby Stores
+ 105
Wholesale - Other
+ 156
Long Distance Carriers
+ 197
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 20 27.38 7.46% 4.49%
Last Week 6 28.08 12.11% 10.75%
13 Weeks 392 29.46 16.94%
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 REXI Resource America, Inc. 115
Top Technical MDTH MedCath Corporation 64
Top Fundamental SCSS Select Comfort Corp. 88
Top Tech. & Fund. SHOO Steven Madden, Ltd. 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 BTX BioTime, Inc. 95
Top Technical BTX BioTime, Inc. 95
Top Fundamental UTEK Ultratech, Inc. 58
Top Tech. & Fund. UTEK Ultratech, Inc. 58
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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