Weekly Newsletter 12/02/11
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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 markets had their strongest week since March 2009 after a group of central banks including the Federal Reserve promised to improve the liquidity of US dollars to ease inter-bank overnight lending rates. Increasing liquidity to the banks is good for stocks, as we have seen with the Fed's quantitative easing policies, so the shorts moved quickly to cover on Wednesday. By Friday the momentum was gone and the markets closed essentially flat on Friday.

The week's gains and volume action were sufficient to turn our trend indicators to 'Up' for the Dow and S&P 500. While the short term trend is positive, the NASDAQ chart still shows that there is tough sleding ahead, although the rally could continue for a few more days yet. The daily close chart shows the downward resistance line about to intersect with the 200 day moving average.  This will create strong resistance between 2670 and 2740. A breakthrough above those levels would be very bullish.

Wednesday's move higher on strong volume produced 49 breakout alerts with 29 confirmed. The total confirmed for the week rose to 42.

NASDAQ Composite
 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

Trading Cups-with-Handle in a Volatile Market

We last discussed our suggestions for trading Cup-with-Handle breakouts in our March 13,2010 Newsletter. Given the somewhat chaotic market conditions in the last 12 months , which has seen the S&P 500 gain just 1.9%, we decided to do some further backtesting to see what has worked over that time period.

Use of Stop Losses

The recent volatility in the markets present a challenge with regard to setting stop losses. Our recommendation in March 2010 was for setting a stop loss on the breakout price of 8% and a trailing stop of 11%. We also suggested only using stocks that qualified for our MTC rating. Over the last year, however, using these values would have resulted in a loss of 15.5% on a four position portfolio. In other words, while the "let your winners run" dictum has worked in the past, in periods of high volatility it is a recipe for disaster.

We are now suggesting that a trailing stop value of 4% be used. Over the last year this would have yielded a gain of over 16% with a four position porfolio.

StopLoss Backtest

MTC Rating

Given thesechanges to our stop less suggestions, does this change our MTC rating? Well, we can definitely say that stocks that breakout with the MTC rating outperform all breakouts. With the 4% stop loss, a four position portfolio which bought on alert any stock meeting our basic breakout criteria earned 13.9%. This group does, of course, include the MTC stocks, so we can deduce that the return would have been worse if MTC stocks were excluded.

Stop losses all breakouts

Buy on Alert or Buy on Breakout

With almost daily reversals of market direction, is it better to buy when an alert is issed, rather than wait for confirmation? Our backtest says that you definitely should buy on alert.

A backtest on MTC stocks with a 4% trailing stop loss showed that by waiting for confirmation your gain goes down to just 2.5% (but still better than the S&P 500). This suggests that our Gold level subscription, which includes real time alerts, is a better investment than our Silver level.

Buy on Alert but Sell if Unconfirmed

So you have bought on breakout alert but the stock doesn't meet the price and/or volume requirement at the end of the day, so should you sell at the next day's open? The backtest suggests no, hang-on to it until the 4% trailing stop kicks in. Selling at the next day's open gives a 14.2% return - reducing your potential profit by 2%.

 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Trend
Dow 12019.4 7.01% 3.82% Up
NASDAQ 2626.93 7.59% -0.98% Up
S&P 500 1244.28 7.39% -1.06% Up
Russell 2000 735.02 10.34% -6.21% Up
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
Russell 2000
10.34 %
Russell 2000
6.93 %
Dow Jones
-1.09 %
Dow Jones
3.82 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Toy & Hobby Stores Specialty Eateries Personal Computers Personal Computers
 Most Improved Industry (by change in technical rank2)
+ 50
Tobacco Products - Other
+ 56
Toy & Hobby Stores
+ 178
Toy & Hobby Stores
+ 194
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 42 20.69 3.65% 0.76%
Last Week 8 18.23 3.8% 1.22%
13 Weeks 276 21.31 8.26%
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 PDFS PDF Solutions, Inc.  117
Top Technical UST Altria Group, Inc.  20
Top Fundamental MELI MercadoLibre, Inc.  0
Top Tech. & Fund. MELI MercadoLibre, 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
Company Name
Expected Gain1
Best Overall CLFC Center Financial Corporation  92
Top Technical TOBC Tower Bancorp, Inc.  47
Top Fundamental WWD Woodward Inc  44
Top Tech. & Fund. ABMD ABIOMED, Inc.  73
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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