Weekly Newsletter 05/04/12
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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  

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.

Nasdaq Composite

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:
  1. The stock must pull back to within +/- 1% of the original BoP within two weeks of breakout. Stocks that fall below -1% of the BoP are not considered.
  2. If the high after initial breakout was more than 5% above BoP then do not consider.
  3. The high after breakout and before pullback represents a new resistance level. We only enter a trade if the intraday price rises to at least that level ) BoP2.
Effectively, these rules define a second handle following the initial one. This is how our new pattern looks:

2nd handle pattern
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.

2nd handle breakouts

As we can see, the number of positive gains greatly exceeds the negative:

2nd Handle Breakouts

WinnersLosers
Week 181.8%18.2%
Week 271.0%29.0%
Week 366.2%33.1%
Week 467.4%31.9%

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.

All Breakouts

We see that there a lot more negative gains over the four weeks. A winners/losers analysis bears this out:

Regular CwH Breakouts

WinnersLosers
Week 169.7%30.3%
Week 267.2%32.2%
Week 366.0%32.8%
Week 466.1%32.0%

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
Index Value Change Week Change YTD Trend
Dow 13038.3 -1.44% 6.72% Down
NASDAQ 2956.34 -3.68% 13.48% Up
S&P 500 1369.1 -2.44% 8.87% Up
Russell 2000 791.84 -4.07% 6.87% Down
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
Dow Jones
-1.44 %
S&P 500
1.74 %
NASDAQ Composite
10.06 %
NASDAQ Composite
13.48 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Home Improvement Stores Medical Practitioners Personal Computers Personal Computers
 Most Improved Industry (by change in technical rank2)
Confectioners
+ 74
Computers Wholesale
+ 155
Medical Practitioners
+ 123
Building Materials Wholesale
+ 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 13 17.77 5.49% -0.05%
Last Week 13 22.62 4.04% -3.21%
13 Weeks 257 23.62 10.75%
-1.51%
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 IDSY I.D. Systems, Inc. 95
Top Technical IDSY I.D. Systems, Inc. 95
Top Fundamental QCOR Questcor Pharmaceuticals, Inc. 48
Top Tech. & Fund. QCOR Questcor Pharmaceuticals, Inc. 48
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 PRFT Perficient, Inc. 64
Top Technical MDSO Medidata Solutions Inc 37
Top Fundamental PRFT Perficient, Inc. 64
Top Tech. & Fund. MDSO Medidata Solutions Inc 37
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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