Weekly Newsletter 06/17/11
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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 equivolume charts provide a succinct picture of the damage done to the NASDAQ Composite in June with five distribution days since the start of the month. As we expected, the 200 dma level for the NASDAQ Composite provided only brief support on Monday until the index sank to its previous support level of around 2603 on Thursday. Support came in at that level but Friday brought disappointing earnings from Research in Motion (RIMM) and the index fell again on heavy volume.

NASDAQ Comp Equivolume

The equivolume chart clearly shows the bounce off the support level on Thursday and again on Friday which gives some hope that the current correction may be over. Also the NASDAQ was the only index in the red at Friday's close and the other major indexes closed the week for a slight gain, so the rising tide could lift the NASDAQ's boat on Monday.

With the NASDAQ in decline, the number of breakouts was inevitably low with just three confirmed and only one, BGS, staying positive through Friday's close. Last weeks standouts, JVA anc PCYC, continued strongly with gains of 85% and 28% respectively.

 New Features this Week Additional Value that we added this week

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This Week's Top Tip Tips for getting the most out of our site

Beware of Stop Loss Orders

The May edition of the AAII Journal contained an excellent discussion of how Buy and Sell order get filled. If you are an AAII member, you can read the article How Your Buy and Sell Orders Get Filled on their web site.

The main take-away from the article is the risk posed by Stop Loss orders. We may naively think that a stop loss order protects our downside risk, but the article teaches us otherwise:

I would say stop orders on the very surface sound like a really great thing. If my stock goes down while I’m on vacation, I’m going to stop myself out, or in other words limit my downside losses on a particular security by utilizing this order type. It is a very popular order type among individual investors because no one is standing in front of their quote terminal all the time.

However, it’s very important to understand what this means. There are a few different types of stop orders that you can enter. We’ll just talk about downside stop orders (there are actually upside stop orders that you can enter, too). In the case of a downside stop order, you could say, “I bought my stock XYZ at $20.00 per share,” and once you completed that sale, if XYZ drops to $18.00 per share, then you could decide, “I don’t want to own it any more, because in my mind the fundamentals of that stock changed and I want to get out of it.” So you enter an order to stop yourself out at $18.00.

What most people don’t understand is that stock prices can move very quickly in a very short amount of time. And stock prices can open at the start of trading on one day at very different prices than where they closed at the end of trading the previous day.

Let’s say you enter a plain stop order that says, “If the stock trades at $18.00 per share, I want to make this a market order and get out at the best prevailing price.” During the order life cycle process, there is actually an activation phase and an order execution phase. The activation phase takes place when the order trades at $18.00 or less. If the stock then opens at $16.00, your stop order is activated, because it is lower than your $18.00 stop price. And the stock sells at the best available market price. In a quickly moving situation, the best price available might be $15.00. You see this happen in circumstances like the flash crash and in circumstances where trading in a stock is halted because of an impending news situation that will have material changes in the company, and the stock opens at a very different price. It is very discouraging for the investor when that happens, but those were the exact instructions provided on the stop order.

Another situation can arise where your stock is trading at $20 so you place your stop loss order at, say $16. If another trader puts in a buy limit order at $16 then that will trigger your order and you will be out $4. As one of the comments to the article says "I now recognize that stop loss orders are nothing more than an offer to sell my valuable securities to someone else at a large discount!".

 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Trend
Dow 12004.4 0.44% 3.69% Up
NASDAQ 2616.48 -1.03% -1.37% Down
S&P 500 1271.5 0.04% 1.1% Up
Russell 2000 781.75 0.28% -0.24% Down
Wilshire 5000 13397.3 -0.05% 0.81% Up
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
Dow Jones
0.44 %
Dow Jones
1.23 %
Dow Jones
4.46 %
Dow Jones
3.69 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Cigarettes Cigarettes Cigarettes Long-Term Care Facilities
 Most Improved Industry (by change in technical rank2)
Office Supplies
+ 63
Closed-End Fund - Debt
+ 81
Personal Computers
+ 191
Aerospace/Defense - Major Diversified
+ 162
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 3 11.31 1.76% -1.1%
Last Week 21 11.46 4.33% -0.87%
13 Weeks 178 11.62 11.46%
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 CLFD Clearfield, Inc. 113
Top Technical NSTC Ness Technologies, Inc. 78
Top Fundamental CFX Colfax Corporation 42
Top Tech. & Fund. CFX Colfax Corporation 42
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 BGS B&G Foods, Inc. 56
Top Technical HOC Holly Corporation 41
Top Fundamental BGS B&G Foods, Inc. 56
Top Tech. & Fund. BGS B&G Foods, Inc. 56
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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