Weekly Newsletter 01/13/12
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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 New Year is off to a good start with several breakouts making gains of over 25% already. ACHN (Achillion Pharmaceuticals) has gained over 50%,  VOXX (Voxx International) reached a 35% intraday gain over its breakout price and NQ (NetQin Mobile Inc) jumped 28%.

The NASDAQ Composite has been rising steadily but the volume trend is downward so we wonder how long the momentum can be sustained. There are many headwinds facing the economy, as Nouriel Roubini explains here but perhaps the source of optimism driving the markets higher is obtained in this observation by Roubini: "Given the bearish outlook for US economic growth, the Fed can be expected to engage in another round of quantitative easing." QE3 may not help the economy, but it will certainly move stocks higher. If so, the NASDAQ faces resistance almost immediately at less than 1% above its Friday close and then again at 2863.

NASDAQ Composite

The markets closed higher for the second week of the year but with tensions rising in the Strait of Hormuz, in response to increasing western pressure on Iran, one wonders how long this can continue. For now, oil traders are discounting Iran's threats to close the strait as a bluff they can't carry out because of the damage it would do to its own economy, and oil futures actually retreated on Friday. But Iran is not a democracy and has shown it will deal harshly with any internal rebellion that might occur in response to the economic hardship of its people. At home the rhetoric is becoming increasingly strident as the Administration cannot appear to be weak in an election year so a continued heightening of tension seems inevitable with the "risk premium" on oil likely to rise.

 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

More on the Importance of Volume

In the commentary above we said of the NASDAQ "the volume trend is downward so we wonder how long the momentum can be sustained." So where does this concern about falling volume while prices are rising come from?

In "Technical Analysis of the Financial Markets" John J. Murphy describes it like this: "The level of volume measures the intensity or urgency behind the price move. Heavier volume reflects a higher degree of of intensity or pressure". Or more succinctly "volume should increase or expand in the direction of the existing price trend".

So when we see the price trend rising but the volume level falling, then that indicates that the intensity of support for the existing price trend is waning and hence our concern.

When price rises and volume expands we say that a stock is under "accumulation" and when price declines but volume expands we say that a stock is under "distribution". The concepts of accumulation and distribution are therefore important because they combine measures of price movement and volume. When stocks start to come under accumulation, we want to be a buyer and when they start to come under distribution, we want to be a seller.

We use accumulation and distribution in our proprietary turning point algorithm as confirmation of price trends measured by the stochRSI. You can see these at work in our "Trend Reversal Signals" tool where we show price, smoothed StochRSI and smoothed Acc/Dis together.

This understanding of the importance of volume was originally contained in a series of editorials published in the Wall Street Journal at the turn of the 20'th century written by Charles Dow. These have come to be known as  "Dow's Theory".

 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Trend
Dow 12422.1 0.5% 1.67% Down
NASDAQ 2710.67 1.36% 4.05% Up
S&P 500 1289.09 0.88% 2.5% Down
Russell 2000 764.2 1.93% 3.14% Up
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
Russell 2000
1.93 %
Russell 2000
6.68 %
Dow Jones
-0.46 %
NASDAQ Composite
4.05 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Toy & Hobby Stores Toy & Hobby Stores Toy & Hobby Stores Specialty Eateries
 Most Improved Industry (by change in technical rank2)
Major Airlines
+ 59
Major Airlines
+ 77
Residential Construction
+ 159
Toy & Hobby Stores
+ 203
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 23 24.69 9.2% 5.65%
Last Week 26 22.85 7.17% 4.52%
13 Weeks 321 24.85 10.86%
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
Top Technical MBI MBIA Inc.  61
Top Fundamental RAX Rackspace Hosting, Inc.  41
Top Tech. & Fund. RAX Rackspace Hosting, Inc.  41
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 CELL
Top Technical RGR Sturm, Ruger & Company  56
Top Fundamental CELG Celgene Corporation  26
Top Tech. & Fund. CELG Celgene Corporation  26
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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