Weekly Newsletter 07/28/13
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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 Composite is trading in a narrow range between 3570 and 2620 as it consolidates the recent upward move. A break above or below these levels on higher than average volume will indicate the direction of the next move. Volume has improved to 50 day average levels indicating that the recent run up has brought more interest into the market and that hopes are that the market will continue to move higher. Instead we may see profit taking from the wiser market players. Our market trend indicators all point up but I believe there is a higher likelihood of a break below support at 3570 than a break above resistance at 2620.

NASDAQ Composite

The number of breakouts fell to 7 this week - a reflection of the consolidation that is taking place. The standout performer was TROV (TrovaGene) which broke out from a classic CwH base on Monday and closed 10.7% higher. The stock has now formed a new handle and is again on our CwH watchlist. This stock's Relative Strength Rank on Monday was 96. Our research shows that stocks with an RS 0f 90 or more generally outperform stocks with a lower RS. Although we place all stocks with an RS of 80 or more on our watchlists, we depart from CAN SLIM and believe stocks with an RS of 90 or more are much better candidates. See below for the evidence for this belief.
 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
Why You Should only Trade Stocks with an RS >= 90

From the earliest days of our website, I found that RS rank was highly correlated with performance after breakout. In 2010 I studied the evidence for why this is so in more detail and present it again for our new readers.

RS Rank can take values from 1 to 99 but we only select stocks with an RS Rank of at least 70 for our cup-with-handle pattern and publish only those with an RS >= 80 . Looking at our data since 2004 we can see how stocks in each percentile performed. The chart below shows the mean performance after breakout for each RS percentile measured from breakout price to highest gain after breakout.

Max Gain vs RS Rank

The graph clearly shows that there is a positive relationship between RS rank and subsequent performance after breakout. This is confirmed by the positive slope of the regression line through the data. The data for this plot was not filtered by volume on breakout day and therefore includes all volume levels.

The next chart shows the spread around the mean of the highest gains for each percentile. The circles represent the mean maximum gain after breakout for each value of RS rank. The vertical bars represent the standard error in estimating the mean from our sample. If we are aiming for a gain of 25% after breakout, we can see that its only RS values in the range 90 to 96 that consistently produce  the target return. Interestingly, it seems that RS values above 96 perform only at an average level, indicating that these stocks are perhaps overvalued with less potential for further gains.
 
mean max gain vs RS Rank

Conclusion

While breakouts from a cup-with-handle base can perform well on average, the best potential for highest gain comes from stocks in the 90-96 range.
 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Trend
Dow 15558.8 0.09% 18.73% Up
NASDAQ 3613.16 0.35% 19.66% Up
S&P 500 1691.65 -0.23% 18.61% Up
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
NASDAQ Composite
0.35 %
NASDAQ Composite
10.18 %
NASDAQ Composite
14.71 %
NASDAQ Composite
19.66 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Music & Video Stores Music & Video Stores Music & Video Stores Music & Video Stores
 Most Improved Industry (by change in technical rank2)
Electronics Wholesale
+ 37
Healthcare Information Services
+ 93
Home Improvement Stores
+ 144
Toy & Hobby Stores
+ 210
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 7 10.54 5.46% 1.56%
Last Week 11 10.92 7.28% 3.51%
13 Weeks 134 11.46 18.15%
9.86%
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 PKD Parker Drilling Company 113
Top Technical PKD Parker Drilling Company 113
Top Fundamental INVN InvenSense Inc 52
Top Tech. & Fund. INVN InvenSense Inc 52
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 HHS Harte-Hanks, Inc. 73
Top Technical SOHU Sohu.com Inc 38
Top Fundamental UTHR United Therapeutics Corporation 38
Top Tech. & Fund. UTHR United Therapeutics Corporation 38
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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