Weekly Newsletter 11/11/12
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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 markets went over the cliff on Wednesday but found a floor on Friday as political leaders promised to work together to find a solution before sequestration sends the economy into recession.  The NASDAQ chart shows that fear of the 'fiscal cliff' and further slowing of the European economy, caused the index to crash through the 200 day moving average which had been providing support until Wednesday.

Before Wednesday's dive, our trend indicators had all turned positive as it appeared the major indexes had found a bottom. There is always several days delay before the indicators can confirm a new trend so their current 'up' status should be ignored until we get further information. To help asses the true situation, for this week's chart I've added the one and two standard deviation Bollinger Bands and the RSI momentum oscillator. Both indicators show that the index is oversold. Note that the RSI is already turning up and it is also unusual for the index to stay outside the two standard deviation BB for long. I think these factors make it likely, although not certain, that we will move up from here.

NASDAQ Composite

 New Features this Week Additional Value that we added this week

New CwH Backtest Option

At the request of a subscriber, I've added an additional parameter to the cup-with-handle backtest tool. The new option allows you to test selling at the next day's open if a certain volume to 50 day average volume(ADV)  ratio is not met by the close. This allows you to test a scenario where you buy on alert at, say, 1.5 times ADV and then sell at the next open if the volume did not meet, say, 2.5 times ADV.

I discuss the advantages of this in this week's tip.

This Week's Top Tip Tips for getting the most out of our site

Optimum Hold Time and Best Volume to ADV Ratio

The same subscriber asked "Can you run a test that would show the optimal parameters of how long to stay in a trade and at what level you would set the percent gain?".

To test how long to stay in a trade, I ran the backtest for 1 year and 5 years using:
Number of Positions: 4;
    Buy Rule: Buy on Breakout Alert at 1.5 times volume
    Sell if Unconfirmed: no
    Stop Loss: 6 %

    Trailing Stop: 6 %
    Target Gain: 100 %
    Use Market Trend: yes
    Minimum RS Rank: 92
    Minimum BoP: $6
    Minimum ADV: 100k

Over 12 months, the optimum hold period was 30 days with an overall return of 63.6% with an average of 13.9% per trade.
Over 5 years, the optimum hold period was also 30 days with an overall return of 239% with average of 10.9% per trade.

Using that optimum hold period, I then tested the effect of selling at the next open if certain breakout volumes were not met, using the new confirmation volume option, over the last 12 months. The results are charted in this graph (backtest settings were as above):

Confirmation Volumes

As you can see, if you wish to sell at open if a minimum volume is not met by the close on breakout day, then a minimum confirmation volume of  greater than 2.75 times ADV is desirable and 3.75 times ADV is optimal with a total return of 64.6%. Higher values are very suboptimal.

Note though, that this strategy is only marginally better (64.6% cf. 63.6%) than buying on alert at 1.5 times ADV and holding rather than selling at the next open.
 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Trend
Dow 12815.4 -2.12% 4.89% Up
NASDAQ 2904.87 -2.59% 11.5% Up
S&P 500 1379.85 -2.43% 9.72% Up
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
Dow Jones
-2.12 %
Russell 2000
-1.85 %
S&P 500
1.96 %
NASDAQ Composite
11.5 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Lumber - Wood Production Lumber - Wood Production Lumber - Wood Production Lumber - Wood Production
 Most Improved Industry (by change in technical rank2)
+ 32
Music & Video Stores
+ 76
+ 156
+ 164
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 20.31 3.15% 1.26%
Last Week 28 20 4.69% 0.32%
13 Weeks 328 21 7.78%
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 SKH Skilled Healthcare Group, Inc. 100
Top Technical SKH Skilled Healthcare Group, Inc. 100
Top Fundamental WOR Worthington Industries, Inc. 46
Top Tech. & Fund. CHS Chico's FAS, Inc. 49
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 OMX OfficeMax Incorporated 81
Top Technical TPCG TPC Group Inc 34
Top Fundamental LCC US Airways Group, Inc. 67
Top Tech. & Fund. HOLI Hollysys Automation Technologies Ltd 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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