|Weekly Newsletter 11/15/13|
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|Prior editions of this newsletter with our valuable Tips of the Week are available here.|
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.
|New Features this Week||Additional Value that we added this week|
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.
|This Week's Top Tip||Tips for getting the most out of our site|
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:
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.
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.
% Gain Above Breakout Price for Squeeze vs Non-Squeeze CwH
|+ Market Summary||Overview of market direction and industry rotation|
|Weekly Breakout Report||How confirmed breakouts performed this week|
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|
|Top Second Chances||Stocks that broke out this week and are still in buyable range|
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