Weekly Newsletter 10/07/11
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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 moved higher this week but reversed on Friday as traders and investors continued to fret over the European sovereign debt issue and Fitch downgraded Spanish and Italian debt. Although a rally took hold in the afternoon, traders took profits in the last hour of trading on Friday not wishing to be exposed to disappointing news that could emerge from a coming meeting on Sunday between Germany's Chancellor Merkel and French President Sarkozy.

The week contained two examples of the success of technical analysis. In last week's newsletter we identified a support level at 2320 and sure enough a bounce came on Monday at that level. On Thursday, we warned of resistance at the 50 day moving average and indeed Friday's reversal came as the index touched its 50 day moving average. The 6-month chart shows that it has retreated from its 50 day average three times since making the head of the head and shoulders pattern we've discussed for the last two weeks. We anticipate that the trend will remain down and that there is a fair to good chance that the index will reach the target we identified last week of just below 2200.

NASDAQ Composite

If you think that the support level at 2320 and the retreats from the 50 day average are coincidence and that technical analysis is faux-science, then have a look at this link regarding Monday's bounce. With computer trading becoming all-pervading, these technical levels assume more significance.

Steve Jobs

Sad MacEveryone is praising Steve Jobs and so must I. I've been in the IT industry for 45 years and without doubt he was the most influential person in the democratization of computing. The Apple II was the first really useful personal computer and the Macintosh took the gui out of the labs at PARC and made the computer truly friendly for the first time. Unfortunately the Mac lost out to the PC in the corporate world because IT managers bought into the IBM propaganda that 'no IT manager ever got fired for buying IBM' and preferred the PC to the Mac. Nevertheless, the gui was adopted by Microsoft but it was not until 1990 that a useful (but still crippled)  version (3.0) appeared. Windows has now become almost as easy to use as the first Macintosh was, but it took 20 years. Jobs must get the credit for the vision that made that possible.
 New Features this Week Additional Value that we added this week

Drawdown is now calculated for both long and short strategies on the Stock Timeliness Checkup tool.

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

Stock Timeliness Checkup Tool Drawdown Calculation

The maximum drawdown is now calculated when you run either a long or short position. The maximum drawdown is measured from the point where you open a position to the lowest subsequent intra-day low, for long positions, or the highest intraday high for short positions,  before the position is closed.

The display now shows the maximum drawdown out of all positions taken over the backtest period, and the date it occurred. Here are the results for going short on BAC:

BAC Drawdown Results

To illustrate how the drawdown is calculated, have a look at this chart. The position was opened on 8/19/08 at $28.96 and not closed, using the DJI trend as a reference, until 2/4/09 at $5.47. However, before the position was closed the price rose to an intra-day high of $39.5 on 9/19/08 giving you a loss, if you closed the position at that price of 36%. That  was the maximum drawdown of the 14 positions opened and closed over the backtest period.

BAC Short Example

The tool allows you to test trailing stop levels. In the example above, no trailing stop was used, but if a trailing stop of 10% were used on this same trade, then you would have covered on 8/28/08 for a loss of $2.03 or 6.1%.

In the example above, you would have had income of $28.96 when you opened the position and then paid out $5.47 when you closed the position. Your net profit therefore was $23.49 for an outlay of $5.47 - a handsome profit of 429%!  You would have had to have great confidence in our trend signals though, and possibly nerves of steel!

Note: none of these calculations allow for broker fees or slippage.

 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Trend
Dow 11103.1 1.74% -4.1% Down
NASDAQ 2479.35 2.65% -6.54% Down
S&P 500 1155.46 2.12% -8.12% Up
Russell 2000 656.21 1.87% -16.26% Up
Wilshire 5000 12020.5 2.11% -9.55% Down
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
NASDAQ Composite
2.65 %
Dow Jones
-12.28 %
Dow Jones
-10.31 %
Dow Jones
-4.1 %
 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)
Data Storage Devices
+ 48
Recreational Vehicles
+ 88
Food - Major Diversified
+ 132
Drug Stores
+ 183
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 10 12.08 2.82% -2.03%
Last Week 10 12.15 4.65% -1.23%
13 Weeks 260 13.08 6.68%
-11.38%
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 VCBI Virginia Commerce Bancorp, Inc.   94
Top Technical RTSA iPath Short Extended Russell 2000 TR Index ETN&nbs 56
Top Fundamental AAPL Apple Inc.   36
Top Tech. & Fund. AAPL Apple Inc.   0
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 RNOW RightNow Technologies   52
Top Technical RWM ProShares Short Russell2000(ETF)   36
Top Fundamental RNOW RightNow Technologies   52
Top Tech. & Fund. RNOW RightNow Technologies   52
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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