Weekly Newsletter 07/18/14
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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 is consolidating and delivered two accumulation days this week on Monday and Wednesday. The downing of MH17 hit the markets hard on Thursday but Friday's recovery shows that the index still has support.

NASDAQ Comp
 Weekly Breakout Report  

Two accumulation days this week produced a jump in the number of breakouts to 26 following just 16 last week. The top performer, RUSS, broke out from a head and shoulders bottom, which has been a rare pattern in the recent bull market. Interestingly, RUSS was also in a squeeze but we did not report it as such as the momentum was negative on the day before breakout.

Breakouts for Week Beginning 07/14/14
Brkout Date Symbol Base Squeeze BrkoutOut Price Brkout Day Close Last Close Current % off BOP Gain at Intraday High
07/17/14 RUSS HSB N 10.23 12.45 11.52 12.61 21.7
07/14/14 PEIX CwH N 15.79 16.98 17.79 12.67 14.5
07/16/14 TSEM CwH N 10.16 11.26 11.17 9.94 11.22
07/14/14 CBK CwH N 9.04 10.03 9.29 2.77 10.95
07/16/14 INVE HTF N 11.25 11.78 11.85 5.33 6.58
07/16/14 BX SQZ Y 33.50 33.98 35.7 6.57 6.57
07/15/14 BONA SQZ Y 6.72 6.9 6.78 0.89 5.65
07/17/14 TMF CwH N 61.91 64.04 63.48 2.54 3.57
07/14/14 HNP CwH N 47.06 47.48 47.1 0.08 3.06
07/18/14 WOOF SQZ Y 36.71 37.26 37.26 1.50 2.72
07/16/14 ESC CwH N 33.00 33.10 33.66 2.00 2.39
07/18/14 ENPH CwH N 9.69 9.70 9.7 0.10 2.06
07/14/14 MCHX CwH N 12.14 12.39 11.9 -1.98 2.06
07/15/14 BBL CwH N 68.37 68.59 68.71 0.50 2.03
07/17/14 CF SQZ Y 249.33 250.85 252.54 1.29 1.47
07/18/14 SKX SQZ Y 47.37 47.69 47.69 0.68 1.33
07/14/14 ORBC SQZ Y 6.91 7 6.42 -7.09 1.3
07/14/14 QCOR CwH N 95.00 96.22 95.01 0.01 1.28
07/16/14 CLMT SQZ Y 32.84 33.15 32.25 -1.80 0.94
07/18/14 QGEN CwH N 25.10 25.18 25.18 0.32 0.88
07/18/14 CF SQZ Y 250.95 252.54 252.54 0.63 0.82
07/16/14 CIB SQZ Y 60.43 60.53 60.68 0.41 0.79
07/14/14 PTX HTF N 9.17 9.23 8.38 -8.62 0.65
07/16/14 PUK CwH N 47.49 47.76 47.04 -0.95 0.57
07/17/14 MDCI HTF N 13.80 13.83 13.83 0.22 0.29
07/16/14 USCR SQZ Y 26.27 26.29 26.15 -0.46 0.08
Weekly Average (26 breakouts) 1.54 4.06

 
 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

The Volatility Edge in Options Trading the Cup with Handle and Squeeze
Combination

Those of you who have watched our webinar on options trading the cup and handle with squeeze combination may be interested in a more in-depth analysis of the theory behind why this trading strategy can be successful.

You may know that most options are priced using the Black Scholes model which uses as inputs the current price of the underlying stock, the time to expiry, risk-free interest rate and volatility. For the trading strategy discussed in our webinar, using in-the-money call options, we want the strike price to increase after we have placed our trade. For this to occur we want the underlying price to increase which will increase the volatility which will feed back into the options pricing model thereby raising the strike price and our ability to sell our call option at a profit.

The value in combining the cup with handle pattern and the squeeze is that:
  • we know that a breakout from a CwH pattern is successful about 60% of the time since 2008 (see newsletter 3/15/14) - more in a bull market. This gives us a favorable probability that the underlying price will rise
  • a squeeze situation ensures that the stock is at a historical volatility low so the volatility is highly likely to increase as the underlying price increases.

The combination of rising price and increasing volatility combined with the leverage inherent in options trading makes this trading strategy attractive.

Before entering a trade, a further factor to consider is whether or not the option is fairly priced. This will depend on the volatility implied by the strike price as compared to the true volatility at the time. At this time, our charts combining the Bollinger Band (BB) and Keltner Channel show the volatility as measured by the two standard deviation BB. It should be understood that this is not the volatility implied by putting the strike price (and other variables) into the Black Scholes model and cannot be used to determine if the option is fairly priced. We may add the true volatility to the charts in the near future to allow this comparison to be made.

I am grateful to a reader for directing my attention to The Volatility Edge in Options Trading by Jeff Augen which examines these considerations in great depth. The Wikipedia article on Volatility and Volatility Arbitrage are also very helpful.

 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Trend
Dow 17100.2 0.92% 3.16% Up
NASDAQ 4432.15 0.38% 6.12% Up
S&P 500 1978.22 0.54% 7.03% Up
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
Dow Jones
0.92 %
NASDAQ Composite
5.68 %
S&P 500
7.59 %
S&P 500
7.03 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Copper Drugs Wholesale Toy & Hobby Stores Toy & Hobby Stores
 Most Improved Industry (by change in technical rank2)
Research Services
+ 39
Copper
+ 122
Silver
+ 137
Foreign Utilities
+ 201
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.
 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 PZE Petrobras Argentina S.A. 110
Top Technical PZE Petrobras Argentina S.A. 110
Top Fundamental PFMT Performant Financial Corporation 51
Top Tech. & Fund. PFMT Performant Financial Corporation 51
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 ENPH Enphase Energy, Inc. 91
Top Technical CBK Christopher & Banks Corporation 77
Top Fundamental QCOR Questcor Pharmaceuticals, Inc. 36
Top Tech. & Fund. QCOR Questcor Pharmaceuticals, Inc. 36
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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