The NASDAQ Composite continued to fall this week, as did the other major indexes. The index did not receive support at the 50 day moving average level as might have been expected and the next support level looks to be around 3000. Investors and traders are disappointed with the initial earnings season reports with only 50% of companies beating expectations compared to the usual 67% and continue to be cautious. Our trend indicators for the NASDAQ and S&P 500 remain negative and we recommend caution until the outlook improves.

When setting filters on each watchlist, you have the ability to backtest the filters over a recent time period. This feature had recently become inoperative due to a bug but is now functional again.

More Tips on Using the CwH Backtest Function.

Last week I reported that our MTC (Meets Target Criteria) flag had not worked well over the last year compared to when we initially introduced it. We recommended that of the criteria, only an RS Rank equal to or greater than 92 was valid. I've done some more research using the backtest function and have some interesting results to report.

Firstly, I found that using a stop loss from BoP of 6% and trailing stop of 6% gave the best results regardless of RS Rank level or other factors. These settings were used for all the results discussed here together with a target gain of 100%.

Secondly, if we run the backtest over the last 12 months with an RS Rank requirement of >= 92 comparing holding only one position to holding four positions, we see a distinct difference (minimum breakout volume requirement 1.5 times average):

RS Rank >= 92, 1 simultaneous position, Min ADV 1.5	12 month gain: 64%	Days fully invested: 38%
RS Rank >= 92,  4 simultaneous positions, Min ADV 1.5.	12 month gain: 56%%	Days fully invested: 19%

Why is the gain so much lower with 4 positions? Remember that with 4 positions, we only assign 25% of our available capital to our first trade and then to each subsequent trade. Because there are fewer breakouts with an RS rank of 92 or higher, we end up putting all our available trading capital to work only half the time of when we allocate all our capital to one position.

Now compare these results with using an RS Rank of 80 or more.

RS Rank >= 80, 1 simultaneous position, Min ADV 1.5	12 month gain: 28%	Days fully invested: 40%
RS Rank >= 80,  4 simultaneous positions, Min ADV 1.5	12 month gain: 54%	Days fully invested: 33%

In this case, using 4 positions gives us a better result because we have many more stocks to choose from so have a higher probability of including higher returning stocks, even tough the number days we are fully invested is still fewer. But both results are inferior to using an RS Rank of 92 or more!

Now lets see what happens if we require a higher breakout day volume of 2.25 times adv which was our previous recommendation.

RS Rank >= 92, 1 simultaneous position, Min ADV 2.25	12 month gain: 33%	Days fully invested: 39%
RS Rank >= 92,  4 simultaneous positions, Min ADV 2.25	12 month gain: 30%%	Days fully invested: 11%

We see that the return is only about half of what we would achieve with the lower minimum volume requirement.

To summarize, our new recommendations are:

• Minimum RS Rank: 92
• Minimum breakout volume: 1.5 times ADV
• Stop loss from BoP: 6%
• Trailing stop loss: 6%

NB: The results above were obtained using a backtest start date of 10/15/2011 and end date of 10/12/2012.