Weekly Newsletter 09/16/11
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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  

The major indexes had a strong week largely as a result of moves by politicians in France and Germany to reassure the world that Greece would remain within the Eurozone and promises by the central banks of the U.S., Britain, Japan and Switzerland to provide dollar funding to under-capitalized European banks. While these moves may be reassuring in the short term, the underlying problems remain and the US market will continue to be captive to events in Europe until there is a solution.

You will see below that we are introducing new trend indicators which will give a better indication of the shorter term market trends. Our former trend indicators (whch are medium term) are signalling down for all the major indexes except the DJI, but our new trend reversal indicators are contradicting the medium term indicators by signalling up for the NASDAQ and down for the DJI.

The NASDAQ Composite has formed what I am calling a quasi-head and shoulders bottom. 'Quasi' because the left shoulder is higher than the head - maybe it should be called a hunchback bottom. The index closed just above resistance at 2600 and the 50 dma but must clear the neckline at about 2670 before the pattern is completed.

NASDAQ

The number of breakouts increased to twelve this week while the number of breakdowns fell back to just two. The increase to twelve breakouts is a positive sign, but gains were small with only Diamond Foods (DMND) gaining more than 5% after it announced a profit jump of 27% and raised revenue projections for the year.

 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

Swing Trade Trend Reversal Signals

Some months ago I took a look at the reliability of William O'Neil's "Follow through day" concept and found it of little value in identifying downward trend reversals. You can read my analysis in  Do Follow Through Days Predict Downward Trend Reversal? and Follow Through Day Follow Through.  Subsequently I began work on a trend reversal system of my own and  identified a promising combination of the stochRSI and Accumulation/Distribution Line indicators which showed promise.  The value of these two indicators is that the stockRSI is price based while the Acc/Dis indicator is volume based. The idea is to use volume accumulation or distribution to confirm price action. In general, a rally without an accompanying increase in volume is weak and unlikely to be sustained and the same goes for a downturn.  (I won't go into the details of either the stochRSI or the AccDis indicator as you can read about them in the links I provided above) .  Over the summer I have continued work on this project and now have some promising results. These will be incorporated into the site in the very near future to provide swing trade trend signals for the major indexes. These will complement the existing medium term trend signals shown each day in the Market Analysis.

To overcome the volatility of the stochRSI, the literature recommends smoothing the indicator with a simple moving average (SMA). I experimented with variations on the length of the SMA but found that using an exponential moving average (EMA) gave better results.  The literature also suggests using a mid-point crossover as the buy or sell indicator while I found that a 40% upward trend crossover and 60% downward trend crossover gave a faster signal. To confirm the signal I looked for increasing accumulation distribution on an upward trend and decreasing accumulation distribution on a downward trend. This also was smoothed with an EMA to reduce day-to-day volatility. Finally, I recognized that the choice of cross over points, and the EMA lengths for both the stockRSI and AccDis, were dependent on the volatility (measured by standard deviation) of the series. The results are a model that can be applied to any time series of indexes or individual stocks.

TRS = EMA(stockRSI,i) + EMA(AccDis,j)
where i and j are the lengths of the EMA's and are dependent on volatility of the series.

Applying the model to the three major indexes over the period since January 1, 2007 gives some impressive results if one goes long when the TRS says buy and sells when the TRS says sell. (The signals could also be used for short selling). The following table summarizes the returns and includes a link to charts showing the trend reversal signals.

Index
Change 1/1/07 - 9/15/11
TRS Return
(index points)
Chart Link
NASDAQ Composite
2423 - 2573 (6.2%)
1063 (44%)
TRS NASDAQ
S&P 500
1416 - 1209 (-14.7%)
138 (9.7%)
TRS S&P 500
DJI 30
12474 - 11433 (-0.83%)
5249 (42.1%)
TRS DJI

Next week, I will work to include the TRS for the major indexes into our Market Analysis page. I am also working on a tool to calculate the TRS for individual stocks.

 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Trend
Dow 11509.1 4.7% -0.59% Up
NASDAQ 2622.31 6.25% -1.15% Down
S&P 500 1216.01 5.35% -3.31% Down
Russell 2000 714.31 5.99% -8.85% Down
Wilshire 5000 1827.27 5.11% -4.7% Down
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
NASDAQ Composite
6.25 %
NASDAQ Composite
0.22 %
NASDAQ Composite
-0.81 %
Dow Jones
-0.59 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Personal Computers Personal Computers Personal Computers Cigarettes
 Most Improved Industry (by change in technical rank2)
Semiconductor - Broad Line
+ 46
Toys & Games
+ 68
Drug Related Products
+ 163
Personal Computers
+ 196
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 12.08 4.34% 2.96%
Last Week 7 11.62 3.22% 0.56%
13 Weeks 269 12.23 6.67%
-6.07%
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 GNMK GenMark Diagnostics, Inc   112
Top Technical VIIX VelocityShares Daily Long VIX Short Term ETN  51
Top Fundamental PCLN priceline.com Incorporated   32
Top Tech. & Fund. PCLN priceline.com Incorporated   32
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 CSR China Security & Surveillance Tech. Inc. &nbs 96
Top Technical CSR China Security & Surveillance Tech. Inc. &nbs 96
Top Fundamental GWW W.W. Grainger, Inc.   38
Top Tech. & Fund. MJN Mead Johnson Nutrition CO   44
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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