Weekly Newsletter 06/03/11
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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  

Our market trend indicator for the NASDAQ Composite turned down on Thursday (06/02). The NASDAQ trend joins the Russell 2000 which turned down back on May 23. Economic data released this week show that manufacturing has slowed, the economy is not adding enough jobs to stop unemployment from rising, retailers are hurting, consumer confidence is slipping and home prices are continuing to fall.

The economic slowdown means profits are likely to fall and with them, stock prices. Federal Reserve policies have supported the recovery in stocks but with quantitative easing ending, there is a good case to be made for bearish sentiment to increase. The NASDAQ Composite 3-year weekly chart shows that a decline to the support level at about 2600 (line B) is likely which would also coincide with the long-term support trend line in place since April, 2009 (line A). A fall to 2600 would represent a further 4.8% decline from Friday's close.

NASDAQ Composite

Our down data confirms the bearish trend: we saw forty breakdowns in this short week compared to just eleven breakouts. Making profits on breakouts is difficult when the market is moving down and of the eleven, seven were under water by Friday's close.

The majority of breakdowns (25) came from a head and shoulders top formation. We have previously found that pattern to be a very reliable indicator of stocks that are about to breakdown. See this weeks Top Tip.

 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 s

Head and Shoulders Chart Pattern Analysis

When we first introduced our Head and Shoulders Top (HST) pattern as a means of detecting short sale candidates our backtesting showed that when we detected this pattern a subsequent breakdown occurred in over 96% of cases.

You can read our backtest methodology and results here.

We concluded that
  • If you hold a long position in a stock that has completed the right shoulder of an H&S pattern, then you should sell because 96% of these stocks will break down.
  • Because of the high probability that a breakdown is about to occur, you may wish to open a short position immediately an H&S is identified before waiting for the breakdown. The position can then be added to when the breakdown occurs.
  • Immediately after the breakdown, set a stop loss at the breakdown price to protect yourself against the 17.6% of breakdowns that recover the next day. Otherwise, a reasonable target profit for the trade is 70% of the target price.
If you are interested in trading HST alerts, then consider this.
  1. Short selling is risky because your potential loss is unlimited. When going long, the maximum amount you can lose is your initial investment, when shorting there is no limit to how high the stock can go from your entry level, so cover quickly when the stock moves against you.
  2. Review the H&S Top watchlist prior to the market open to select stocks you would consider shorting if an alert is issued.
  3. Set a target cover price (see methodology tab on the HST watchlist) before you go short, using either a fixed percentage or an expected support level, and take profits at that level.
  4. If you go short on an alert and the stock recovers above the support level by the close, consider covering your position immediately.
  5. If you go short on an alert and the stock closes below the support price but volume doesn't meet the 1.5 times adv requirement, don't cover but wait for the action on the following day.
  6. Cover when a support level is tested and found to hold.
  7. Don't bet against the market.
 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Trend
Dow 12151.3 -2.33% 4.96% Up
NASDAQ 2732.78 -2.29% 3.01% Down
S&P 500 1300.16 -2.32% 3.38% Up
Russell 2000 808.13 -3.36% 3.12% Down
Wilshire 5000 13742.8 -2.46% 3.41% Up
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
NASDAQ Composite
-2.29 %
Dow Jones
-2.04 %
Russell 2000
6.84 %
Dow Jones
4.96 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks

Cigarettes Long-Term Care Facilities Silver
 Most Improved Industry (by change in technical rank2)
Mortgage Investment
+ 50
Specialized Health Services
+ 76
Confectioners
+ 143
Hospitals
+ 143
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 12 11.92 5.39% -0.27%
Last Week 12 13.08 5.52% -2.14%
13 Weeks 195 14.08 10.66%
-0.8%
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. 124
Top Technical BRNC Bronco Drilling Company, Inc. 67
Top Fundamental CPSI Computer Programs & Systems, Inc. 37
Top Tech. & Fund. CPSI Computer Programs & Systems, Inc. 37
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 ZAGG Zagg Inc 87
Top Technical ZAGG Zagg Inc 87
Top Fundamental ZAGG Zagg Inc 87
Top Tech. & Fund. ZAGG Zagg Inc 87
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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