Weekly Newsletter 05/20/11
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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  

Last week I said "a fall through support line B would signal weakness and a failure to find support at ascending triangle A would be distinctly bearish". In fact, support line B was breached as early as Monday of this week and the index then bounced around line B with that prior support level now posing resistance. Friday's distribution day left the index well below support line A, so we must conclude that a correction will follow, at least down to Tuesday's low of 2760. 

NASDAQ Composite

The number of successful breakouts fell to 7, reflecting the negative short term trend. The average gain of breakouts for the week was 5.1% but this was distorted by Red Robin Gourmet Burgers (RRGB) which gapped up on Friday for a gain of 17.9%.


 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
Progress Report on Trend Reversal Model

Several weeks ago (Newsletter 04/01/11) we analysed the value of using follow through days as a reliable predictor of a downward trend reversal. We concluded that using that indicator, you would have missed 45% of the trend reversals over the last five years and so we began a search for a better indicator.

I started with the Stochastic RSI which a price-based indicator used to determine overbought and oversold levels with more frequency than the standard RSI.  To this I added the Accumulation/Distribution (AccDis) indicator which is volume based. The rationale was to combine the two to derive an indicator in which price trend reversals were confirmed by an increase in volume. While this approach certainly held promise, I found that the results produced whipsawing due to the frequency of the overbought/oversold indicators produced by the Stochastic RSI.

The next step was to slow down the signals by smoothing them with an exponential moving average. The advantage of an exponential MA (EMA) over a simple MA (SMA) is that it gives more weight to recent data whereas the SMA gives equal weight to all days in the chosen period. This now raised the question of what period and what weight to give to the EMA for the Stochastic RSI and AccDis.

Testing various values over the last five years for the DJI, S&P 500, and NASDAQ showed that the degree of smoothing necessary was dependant on the volatility of the index. A high volatility index such as the NASDAQ required more smoothing than a low volatility index such as the DJI or S&P 500.

This suggested that the next step should be to combine volatility into the formula in some way. The usual measure of volatility is the 'beta' value for a stock which compares the volatility of the stock to the volatility of the underlying market.

Our goal now is to have an indicator which will flash buy/sell signals for each stock based on its beta value. That still requires more work but already we can see that the indicator for each index will outperform our current market trend model. The table below shows how the new indicator for each major index compares to our current market trend model. The comparison assumes that we go long when the indicators says the trend is up and sell when the indicators say the trand is down.

5 Year Profit Comparison: 
New Model Versus Current Trend Model

New Model Current Trend Model Improvement
IXIC $1,210 $1,112 8.8%
SPX $464 $297 56.3%
DJI $5,789 $3,189 81.5%

We will keep our current trend model in place until the new one is completed.

 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Trend
Dow 12512 -0.67% 8.07% Up
NASDAQ 2803.32 -0.89% 5.67% Up
S&P 500 1333.27 -0.34% 6.01% Up
Russell 2000 829.06 -0.79% 5.79% Up
Wilshire 5000 14086.4 -0.37% 5.99% Up
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
S&P 500
-0.34 %
Dow Jones
-0.69 %
Russell 2000
14.45 %
Dow Jones
8.07 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Cigarettes Drugs Wholesale Long-Term Care Facilities Silver
 Most Improved Industry (by change in technical rank2)
Tobacco Products - Other
+ 58
Tobacco Products - Other
+ 126
Aerospace/Defense - Major Diversified
+ 171
Hospitals
+ 150
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 12.77 7.71% 5.08%
Last Week 11 13.62 8.91% 3.12%
13 Weeks 206 14 12.41%
0.84%
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
Category
Symbol
Company Name
Expected Gain1
Best Overall CLFD Clearfield, Inc. 125
Top Technical WMG Warner Music Group Corp. 83
Top Fundamental SWI SolarWinds, Inc. 54
Top Tech. & Fund. ZAGG Zagg Inc 91
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
Category
Symbol
Company Name
Expected Gain1
Best Overall TRIB Trinity Biotech plc (ADR) 72
Top Technical MPAA Motorcar Parts of America, Inc. 64
Top Fundamental HIBB Hibbett Sports, Inc. 47
Top Tech. & Fund. MPAA Motorcar Parts of America, Inc. 64
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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