Weekly Newsletter 07/25/14
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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 Composite is trading in a flat base pattern. After attempting to break resistance on Thursday the index pulled back on Friday in response to disappointing earnings and fears new sanctions on Russia would inhibit growth. Friday's Doji pattern indicates indecision as to the next move with a slight bias towards the upside.

 Weekly Breakout Report  

The number of breakouts slipped slightly to 22 from last week's 26. Breakouts from the SqueezePlay watchlist formed the majority of breakouts. As a reminder, the SqueezePlay watchlist is drawn from stocks ascending the right side of a cup but do not qualify for the cup and handle watchlist.
Breakouts for Week Beginning 07/21/14
Brkout Date Symbol Base Squeeze BrkoutOut Price Brkout Day Close Last Close Current % off BOP Gain at Intraday High
07/24/14 UA SQZ Y 60.73 69.55 69.11 13.80 14.52
07/22/14 YINN CwH N 29.53 30.73 33.44 13.24 13.24
07/23/14 CCM CwH N 8.56 9.39 8 -6.54 9.7
07/21/14 ZINC CwH N 18.91 19.54 19.55 3.38 9.47
07/21/14 PXLW CwH N 8.79 9.14 8.32 -5.35 8.19
07/22/14 CDZI SQZ Y 8.84 9.33 9.35 5.77 5.77
07/24/14 NOK SQZ Y 7.88 8.32 8.24 4.57 5.58
07/21/14 TMO SQZ Y 121.10 122.14 125.07 3.28 3.64
07/21/14 IEP SQZ Y 103.25 103.33 105.87 2.54 3.51
07/24/14 WAB CwH N 83.86 86.18 85.46 1.91 2.77
07/24/14 ABC SQZ Y 74.76 76.37 76.79 2.72 2.72
07/21/14 ONNN SQZ Y 9.44 9.44 8.66 -8.26 2.12
07/23/14 RUSHA CwH N 35.27 35.85 35.7 1.22 1.64
07/23/14 HNP CwH N 48.50 48.91 48.61 0.23 0.85
07/24/14 SBUX SQZ Y 79.84 80.45 78.74 -1.38 0.76
07/24/14 PRLB CwH N 85.90 86.51 84.49 -1.64 0.71
07/25/14 XRX CwH N 13.06 13.15 13.15 0.69 0.69
07/21/14 IDIX HTF N 24.17 24.28 24.33 0.66 0.66
07/22/14 SLG SQZ Y 111.16 111.72 109.75 -1.27 0.63
07/24/14 VNO SQZ Y 108.42 108.6 107.34 -1.00 0.17
07/24/14 CVGW SQZ Y 34.79 34.81 34.85 0.17 0.17
07/24/14 MAA SQZ Y 74.30 74.38 74.2 -0.13 0.11
Weekly Average (22 breakouts) 1.3 3.98

 New Features this Week Additional Value that we added this week

Historical Volatility

A knowledge of historical volatility (HV) is important when judging if an option is fairly priced. We've added a HV chart showing HV as calculated by the ThinkorSwim (TOS) trading platform.

The Historical Volatility study calculates volatility which can be expressed by the following formula:


 c is a coefficient depending on the volatility basis and m is average of logarithmic return xi which, in turn, is calculated as follows:

Think or Swim use a value of 20 for the coefficient c and so do we.

If you are interested in trading options from the cup and handle or SqueezePlay watchlists, you will find this chart invaluable. It is accessed from the Technical Indicator chart menu:

HV Menu

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

Historical Volatility for Options Trading

Last week we described why the squeeze and cup with handle combination can lead to profitable trades for both stocks and options. We also mentioned that the historical volatility measure used in trading options is different from the formula used by Bollinger Bands (BB). In fact, the difference is the log term in the formula above. BB's calculate the standard deviation of consecutive closing prices but historical volatility is calculated from the standard deviation of the log of consecutive closing prices.

The chart below shows the Historical Volatility for LVNTA which is on the CwH list and met our squeeze criteria on Thursday (Momentum turned negative and Friday and so it no longer meets the criteria - squeeze chart). The latest HV value is 25.42. This value can now be compared to the Implied Volatility (IV) of the available options. At the time of writing, TOS gives the IV of the August $70 strike price (the closest in-the-money option to the $71.06 Friday close) as 32.6%. This means that an increase in volatility is already built into the bid/ask price of this option.
A breakout will increase the historical volatility and it is up to the option trader to judge whether the likely increase in volatility exceeds the IV built into the trade. It is beyond the scope of this article to explain the complex nuances involved, but I refer you to The Volatility Edge in Options Trading by Jeff Augen for the details.

 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Trend
Dow 16960.6 -0.82% 2.32% Up
NASDAQ 4449.56 0.39% 6.54% Up
S&P 500 1978.34 0.01% 7.03% Up
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
NASDAQ Composite
0.39 %
NASDAQ Composite
6.17 %
S&P 500
10.5 %
S&P 500
7.03 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Aluminum Aluminum Toy & Hobby Stores Toy & Hobby Stores
 Most Improved Industry (by change in technical rank2)
Nonmetallic Mineral Mining
+ 43
Food - Major Diversified
+ 96
Nonmetallic Mineral Mining
+ 150
Foreign Utilities
+ 213
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
Company Name
Expected Gain1
Best Overall PZE Petrobras Argentina S.A. 106
Top Technical PZE Petrobras Argentina S.A. 106
Top Fundamental MEOH Methanex Corporation 34
Top Tech. & Fund. HAR Harman International Industries, Incorporated 34
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 PXLW Pixelworks, Inc. 93
Top Technical PXLW Pixelworks, Inc. 93
Top Fundamental PRLB Proto Labs, Inc. 37
Top Tech. & Fund. PRLB Proto Labs, Inc. 37
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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