The nominee for Chairperson of the Federal Reserve, and also of the rate setting FOMC, Jennifer Yellen, gave further fuel to the fire driving stocks higher in her confirmation hearing this week. She strongly supported the Fed's recent bond buying policy and implied it would continue until there was evidence of a strong, sustainable recovery. Although the Fed's purpose is to maintain full employment and control inflation, the pursuit of the first objective is paramount at the moment and the economic stimulus it provides is inevitably good for stocks. And with bond yields so low, where else can decent returns be found?

Although the NASDAQ chart shows the index is still consolidating, it nevertheless gained a healthy 1.7% for the week. As the commentary above suggests, we expect this upward trend will continue.

Squeeze Alert Filter Now Active

As announced last week, we have placed a filter on each watchlist for stocks that are currently in a "squeeze". As a reminder. a squeeze occurs when volatility drops causing the Bollinger Band to be completely enclosed within the Keltner Channel. By setting and saving this filter on your watchlists you will only receive alerts on stocks that are currently in a squeeze. How to set your alerts for stocks that match your filters is described here.

The squeeze flag is set if the watchlist stock is in a squeeze on the day of the watchlist publication. However, there is a nuance for cup-with-handle stocks, in that the squeeze flag is set if the stock is or has been in a squeeze during the current handle. The reason for that is explained below.

When is an Alert Actionable?

For as long as I have operated breakoutwatch.com, there has always been uncertainty as to which alerts are actionable. The problem is, that although we know that confirmed breakouts are profitable, if they can be bought near the breakout price, we cannot know at the time of the alert if the breakout will be confirmed at the end of the day. We may now be close to having a solution to that problem.

I analyzed all the cup-with-handle alerts issued in 2013 and found that the breakout was always confirmed if the handle does, or did, contain a squeeze. This is a highly significant result because it means that if you can buy at the breakout price when a squeeze is on and sell at the close you will theoretically always make a profit!

I need to test this hypothesis further over a much longer time frame, but the implications for my subscribers, whether or not you can follow the market in real time, are significant:

• If any stock on our cup-with-handle watchlist is tagged with a squeeze flag, you can confidently place a stop order with your broker at the breakout price (a stop order will only be executed if the stock reaches the specified price)..
• This is independent of any other metric we publish on the stock. You can ignore RS Rank, Industry rank, technical score, fundamental score and so on.
• This is also attractive because there are generally few CwH stocks that are tagged with the squeeze flag. As of now, there are only three.

Using our CwH Backtest, I found that the most profitable way to close out a trade begun in this way was to use a 4% trailing stop. Investing the entire portfolio in only one position at a time yielded a cumulative return of 61.8%. The parameters I used and the test results are shown below. While the profits on each trade were small on average, remember these results allow for trading costs.

(Click image for full size)

Finally, there is one other observation I want to share - that in the week following the breakout, average gains by squeeze breakouts were significantly greater than squeeze gains by non-squeeze breakouts.

Average % Gain Above Breakout Price for Squeeze vs Non-Squeeze CwH Breakouts

Squeeze	BO Day Close	Day 2	Day 3	Day 4	Day 5	Day 6	Day 7
yes	2.7	3.0	3.1	3.3	3.1	2.5	2.7
no	0.8	1.2	1.3	1.2	1.5	1.7	1.8