Weekly Newsletter 12/12/14
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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  

While falling gas prices at home promise to put more cash in consumers' pockets and provide a short term economic stimulus, they are a symptom of the malaise in the world economy and portend lower profits for large cap players in the global market. Hence we saw the DJI and S&P 500 fall substantially more than the NASDAQ Composite.

Despite the sharp fall for the week, the biggest hit came on Friday and so our trend indicators remain positive for now. I make no prediction as to how the markets will move next week, but would not be surprised to see the NASDAQ dip to its support level at 4600 (horizontal line on chart).
NASDAQ Comp.

 Weekly Breakout Report  

Not surprisingly, there were fewer breakouts this week, although most of the few that did breakout were quite strong. Note that 5 of the10 breakouts came from a squeeze situation.

Breakouts for Week Beginning 12/08/14
Brkout Date Symbol Base Squeeze BrkoutOut Price Brkout Day Close Last Close Current % off BOP Gain at Intraday High
12/08/14 CEMP CwH N 14.54 16.06 19 30.67 30.67
12/10/14 NBIX CwH Y 19.95 21.89 21.97 10.13 10.13
12/09/14 DHT HSB N 6.03 6.07 6.64 10.12 10.12
12/09/14 QURE CwH N 15.05 16.50 15.55 3.32 9.63
12/10/14 VIXM HTF N 62.02 63.22 67.7 9.16 9.16
12/08/14 MMSI SQZ Y 15.67 15.83 16.41 4.72 5.49
12/08/14 CIA SQZ Y 8.01 8.23 8 -0.12 4.99
12/09/14 AFSI SQZ Y 55.45 56.44 56.87 2.56 4.18
12/12/14 FRED HSB N 15.36 15.82 15.82 2.99 2.99
12/08/14 CSFL SQZ Y 11.56 11.6 10.97 -5.10 0.35
Weekly Average (10 breakouts) 6.85 8.77

 
 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

Big Short Term Profits come from Volatility Squeeze Breakouts

NBIX gained 10% on breakout from a volatility squeeze this week. The squeeze occurred while the stock was in the handle of a cup and handle formation. These situations can be particularly profitable for in-the-money option plays (see The Volatility Edge in Options Trading the Cup with Handle and Squeeze Combination).

NBIX Squeeze Indicator

What is a Volatility Squeeze?

A "Volatility Squeeze" occurs when the volatility of a stock falls below its recent levels. A fall in volatility usually means that the stock is in a period of consolidation and trending in a narrow range. When that period of consolidation ends, normal volatility will return resulting in a breakout to the upside or downside. If we can recognize a volatility squeeze situation, then we have the opportunity to place a long or short position order and profit from the breakout.

How can we recognize a Volatility Squeeze?

A Volatility Squeeze has usually been recognized by a narrowing of the Bollinger Bands. While this method has its merits, it lacks the objectivity necessary to provide a robust, objective, quantifiable trading strategy, We have developed a refinement of the methodology which allows objective identification of a Volatility Squeeze, We detect a "squeeze" when the 2 standard deviation Bollinger Band (BB) narrows to within the Keltner Channel (KC). Bollinger Bands are very susceptible to volatility changes while Keltner Channels are a smoother, trend following, indicator. Consquently, the narrowing of the BB to within the KC gives us a convenient means of algorithmically recognizing a drop in volatility. 

While the BB are within the KC, we say the "squeeze is on". For trading purposes, we are interested in the moment when the squeeze comes off, meaning that the upper and lower BB move outside the KC again, which signals a breakout. Of course, the breakout can be to the upside or downside, but for our Squeeze watchlist we are interested only in breakouts to the upside.

A squeeze can occur while a stock is trending up or down. For our squeeze watchlist, we are only concerned with stocks trending up.

This graphic shows four possible situations in which a squeeze can occur and then come off. In scenarios A, B and C, CRAY would not have appeared on the SQZ watchlist because it was not ascending the right side of a cup, nevertheless A, B and C illustrate the circumstances under which a squeeze can occur. In scenario D, CRAY would have been on the watchlist and an alert would have been issued.

Selecting Stocks for Our Squeeze Watchlist

When we select stocks for our cup-with-Handle (CwH), Double Bottom (DB) or Head and Shoulders Bottom (HSB) patterns, we first look for stocks that have formed  the left side of a cup and are starting to ascend the right side. This behavior is common to all three patterns and we place these stocks on an internal watchlist we call Basewatch. To select stocks  for the Squeeze (SQZ) watchlist, our algorithms examine  each stock on Basewatch to determine if the squeeze is on for each stock. To remove the likelihood that the stock could breakdown from the squeeze we also look at the momentum of the stock and the slope of the momentum curve. If both momentum and the  slope of the momentum curve are positive, then these stocks go on the SQZ watchlist.

CRAY Squeeze

Determining Breakout Price

For the squeeze to come off and give a buy signal, the price must rise to the extent that the Bollinger Bands move outside the Keltner Channel. This price can be calculated and is published on the watchlist as the breakoutprice.
value. So while in a squeeze we can calculate the price at which the stock must close at the next session to lift the upper BB above the upper KC. This price now becomes the breakout price. 

Squeeze Alerts


As with our other watchlists, we monitor the real-time price during the next session and issue an alert if the breakout price is reached.
 
 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Trend
Dow 17280.8 -3.78% 4.25% Up
NASDAQ 4653.6 -2.66% 11.42% Up
S&P 500 2002.33 -3.52% 8.33% Up
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
NASDAQ Composite
-2.66 %
NASDAQ Composite
1.88 %
NASDAQ Composite
7.96 %
NASDAQ Composite
11.42 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Toy & Hobby Stores Toy & Hobby Stores Toy & Hobby Stores Drugs Wholesale
 Most Improved Industry (by change in technical rank2)
Photographic Equipment & Supplies
+ 43
Textile Industrial
+ 62
Drug Related Products
+ 143
Home Health Care
+ 184
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 FTR Frontier Communications Corporation 97
Top Technical FTR Frontier Communications Corporation 97
Top Fundamental CMG Chipotle Mexican Grill, Inc. 30
Top Tech. & Fund. CDW CDW Corporation 44
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 QURE uniQure N.V. 58
Top Technical QURE uniQure N.V. 58
Top Fundamental QURE uniQure N.V. 58
Top Tech. & Fund. QURE uniQure N.V. 58
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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