Weekly Newsletter 06/15/12
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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 NASDAQ continued to trend downward this week on low volume as the markets fretted over rising borrowing costs for Spain and the potentially disruptive effect of this Sunday's Greek election. Suddenly things looked less bleak on Friday as central banks, including the European Central Bank, said they were ready to inject extra capital if the Greek election outcome led to a run on the banks. The result was a surge on above average volume as traders reassessed their risk exposure more positively.

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

Subscriber Strategy Analysis Redux

Last week we looked at a trading strategy based on

1. Buy stocks with an RS Rank >= 92 on breakout if BoP is above 8 day exponential moving average (EMA) and 21 day EMA.
2. Only buy if NASDAQ in uptrend
3. Sell at next open when 8 day EMA is lower than previous day in first decimal place

You can review the results in last weeks newsletter.

I suggested then that selling based on the 8 edma falling by a percentage amount may lead to better outcomes so I have rerun the analysis for several different sell stop options. Also, the subscriber who suggested the strategy, proposed that we require only that the 8 edma be rising, NOT that the breakout price be above the 8 edma.

With this change I ran the strategy again since January 2009 for all CwH breakouts with RS Rank >= 92 using a sell at open order if the 8 edma fell by 0.25%, 0.5%, 0.75% and 1%.

The average returns for each analysis were:

Sell When 8 edma Falls
Average Profit
0.25%
4.3%
0.5%
4.4%
0.75%
4.2%
1%
4.2%

As you can see, increasing the stop value beyond 0.5% didn't improve results. For comparison, the average return in last week's analysis was 3.9%, so using a percentage based stop did produce a better outcome, with the best stop value being 0.5%. This gave a profit improvement of 13%.

The average number of days a trade was held also went up from 10.3 days to 13.7 days. A scatter plot and histogram showing the profit distribution follow.

Scatter Plot

The scatter plot shows that very few trades fail after 20 days, so if a sell signal (8 edma drops by 0.5%) has not been given by then, consider adding to the position as it is likely to improve further.

I fitted a polynomial to the plot and this shows clearly that very few trades improve after 60 days, so it would be wise to take profits by then.

Profit Histogram

The histogram shows clearly that there are many more winning trades than losing ones (actually 217 to 175).

These profits are based on being able to buy at the breakout price and sell at the open on the day after the sell signal. While the sell at open prices used in the simulation are achievable, being able to buy at the breakout price is theoretical only. In practice slippage will likely reduce profit margins by 1-2%. Nevertheless, if a trader follows this strategy and reinvests profits, then the accumulated gain over time could be substantial.


 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Trend
Dow 12767.2 1.7% 4.5% Up
NASDAQ 2872.8 0.5% 10.27% Down
S&P 500 1342.84 1.3% 6.78% Up
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
Dow Jones
1.7 %
Dow Jones
-5.97 %
NASDAQ Composite
12.42 %
NASDAQ Composite
10.27 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Building Materials Wholesale Recreational Vehicles Medical Practitioners Recreational Vehicles
 Most Improved Industry (by change in technical rank2)
Foreign Utilities
+ 67
Foreign Utilities
+ 51
Confectioners
+ 168
Building Materials Wholesale
+ 184
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 14 10.54 4.45% 3.58%
Last Week 19 12.62 5.23% 3.3%
13 Weeks 197 13.31 4.73%
-2.96%
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 TRR TRC Companies, Inc. 107
Top Technical TRR TRC Companies, Inc. 107
Top Fundamental LOPE Grand Canyon Education Inc 56
Top Tech. & Fund. LOPE Grand Canyon Education Inc 56
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 OMPI Obagi Medical Products, Inc. 69
Top Technical OMPI Obagi Medical Products, Inc. 69
Top Fundamental OMPI Obagi Medical Products, Inc. 69
Top Tech. & Fund. OMPI Obagi Medical Products, Inc. 69
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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