|Weekly Newsletter 05/04/12|
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Although our trend indicator for the NASDAQ turned positive on Tuesday, two distribution days and a fall below the 50 day average on Friday are likely harbingers of another reversal to come. If the index holds above the 2950 support level then we may see a trading range between 3050 and 2950 develop.
Sunday is the anniversary of the flash crash and there was an insightful article over at The Big Picture:
" More than $250 billion in long term equity funds has retreated from the markets since May 6th, 2010 – despite a slow but steady improvement in the economy and a stock market that has nearly doubled since the 2009 lows. It isn’t that these investors don’t have confidence in the economy. They don’t have confidence in our markets.
It isn’t hard to blame them. They have witnessed a radical transformation of the best capital allocation market system in the world....." Read More
|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|
Two weeks ago we looked at the question of whether stocks that breakout and then pull back to within 1% of their breakout price within two weeks of initial breakout offered investment potential as compared to normal breakouts. We looked at how they performed within 4 weeks of their pullback and concluded that these stocks did indeed have potential, see (Performance of Breakouts that pull back to Support)
As we pointed out at the time, the analysis was inconclusive as there was no defined entry point for the trade (if you bought on pullback to with 1% of BoP, there was no way of knowing that the stock would not fall further).
We have now defined a hypothetical entry point and can continue our analysis.
We reason that before pulling back, the stock must have set a new resistance level above the original breakout price, so we will only open a trade if that resistance level is reached again. From this insight, we can develop a new set of position entry rules as follows:
We found all cup-with-handle stocks that met these conditions since April, 2009 and analysed their performance after 1,2,3 and 4 weeks assuming we bought at the new breakout price. Here are the results presented as a histogram in 5% profit margin increments.
As we can see, the number of positive gains greatly exceeds the negative:
So how do these 2nd handle breakouts compare to initial cup-with-handle breakouts? Now we repeat the analysis for all breakouts since April, 2009, assuming we bought at the initial BoP.
We see that there a lot more negative gains over the four weeks. A winners/losers analysis bears this out:
By comparing the two, we see that 2nd handle breakouts are less risky than regular breakouts. In the first week, there is only an 18% chance of a losing trade while for regular breakouts there is a 30% chance that the trade will be a loser. In other words, by trading second handle breakouts, you reduce your risk by 40%. However, for less risk there is a corresponding drop in overall return. We looked at the average gains made by regular breakouts and 2nd handle breakouts in the 90 days after opening a trade and found an average return for regular breakouts of 20.5% compared to 14.6% for the second handle breakouts. That is, regular breakouts return 40% more than 2nd handle breakouts.
Is there a strategy you would like me to analyse? Let me know and I'll have a go at it for you.
|Market Summary||Overview of market direction and industry rotation|
|Weekly Breakout Report||How confirmed breakouts performed this week|
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|
|Top Second Chances||Stocks that broke out this week and are still in buyable range|
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