Weekly Newsletter 01/16/15
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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 Head and Shoulders Top pattern (HST) for the NASDAQ that I previewed last week was confirmed on Thursday when the index closed below the neckline. All three major indexes show the same pattern.  This would normally be a bearish signal, but Friday's recovery on above average volume with a close near the intraday high, puts a question mark over the next move. I discuss how to interpret an HST pattern in this week's top tip. The conclusion is that if the index does not find support at the 4347 left neckline then a fall to 4350 is possible.

Thursday's fall and Friday's recovery indicate the markets are struggling to understand the impact of Switzerland decision to float the Swiss Franc. David Kotok (of Cumberland Advisors) has a simple explanation:

"For the US to have another major, reliable, sovereign nation trading near zero on its 10-year government bond only puts more downward pressure on global interest rates. Switzerland joins the ranks of Japan, Germany, and others where a riskless 10-year bond is below 1% and close to zero.

Translate all of that into the valuation of financial assets, particularly those in the US, and there is only one outcome. The general trend remains toward higher asset prices while US interest rates remain very low." (emphasis mine).
NASDAQ Composite
 Weekly Breakout Report  

 
Breakouts for Week Beginning 01/12/15
Brkout Date Symbol Base Squeeze BrkoutOut Price Brkout Day Close Last Close Current % off BOP Gain at Intraday High
01/14/15 BBRY HSB N 11.06 12.60 10.24 -7.41 13.92
01/15/15 HDB CwH N 53.20 55.66 57 7.14 7.14
01/12/15 KOLD HTF N 84.00 87.49 70.56 -16.00 5.95
01/14/15 SRNE HTF N 10.80 11.38 9.02 -16.48 5.37
01/13/15 INAP CwH N 8.35 8.45 8.79 5.27 5.27
01/13/15 PRXL DB N 59.93 62.46 62.91 4.97 4.97
01/16/15 CLDX CwH N 19.45 20.30 20.3 4.37 4.37
01/12/15 PACB CwH N 8.00 8.30 7.86 -1.75 4.25
01/15/15 EPI CwH N 22.61 23.16 23.53 4.07 4.07
01/16/15 NVAX CwH N 6.59 6.81 6.81 3.34 3.34
01/13/15 PCYC CwH N 141.55 144.00 145.51 2.80 2.8
01/13/15 SPWR HSB N 26.28 26.57 24.51 -6.74 2.28
01/14/15 TEDU SQZ Y 11.72 11.96 11.71 -0.09 2.05
01/16/15 AMBC CwH N 26.12 26.63 26.63 1.95 1.95
01/14/15 DCT HTF N 36.88 37.50 37.55 1.82 1.82
01/16/15 CISG CwH N 8.33 8.48 8.48 1.80 1.8
01/13/15 ATRC CwH N 20.09 20.37 20.12 0.15 1.39
01/14/15 RUTH CwH N 15.18 15.32 15.25 0.46 0.92
01/14/15 CRUS SQZ Y 24.04 24.26 23.97 -0.29 0.92
01/13/15 QLGC CwH N 13.44 13.55 13.2 -1.79 0.82
01/16/15 AEIS CwH N 24.22 24.41 24.41 0.78 0.78
01/16/15 MNR CwH N 11.89 11.98 11.98 0.76 0.76
01/14/15 GRT CwH N 13.96 13.96 15.25 N/A 0.72
01/15/15 GRT CwH N 13.96 14.06 57 N/A 0.72
01/13/15 CHL DB N 63.17 63.26 63 -0.27 0.14
Weekly Average (25 breakouts) -0.45 3.14

 
 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

Interpreting a Head and Shoulders Top

The head and shoulders top (HST) that the three major indexes completed this week is one of the most reliable bearish pattern. Our analysis shows that it is successful 73% of the time and reaches its target price 59% of the time. It forms after an uptrend and is characterized by three peaks with the center peak higher than the two adjoining peaks. The neckline is a line drawn between the two intraday lows between the peaks.

Our own research and backtest results are in the Newsletter Archive.

We recognize two types of head and shoulder top, depending on the slope of the neckline. We do this so we can recognize a breakdown price and issue alerts when this price is met.



When the neckline is flat or slopes upwards, the breakdown price is calculated as the point where the neckline intersects the price line following formation of the right shoulder. It is at this point that the pattern is completed and a long position should be closed, or a short position opened. At this time we can calculate a 'target' decline which is the distance between the center peak's high and the neckline.


If the neckline slopes down, then it is possible that it will never intersect the price line following the right shoulder, so we use an alternative method of determining a breakdown price. In this case we use the support level between the left shoulder and the head and calculate the target price as the difference between that support level and the center peak's high.

Pattern Recognition


Our algorithm will recognize a head and shoulders top pattern when the following conditions are met.
  1. The stock must be in a confirmed up trend before the pattern begins. An uptrend exists if the the left shoulder is at least 30% higher than the low in the previous 6 months (120 trading days).
  2. The pattern width, shoulder-to-shoulder, must be 6 months (120 trading days) or less.
  3. The head must have occurred within the last 6 months (120 trading days).
  4. There must be approximate symmetry to the pattern. We determine this by requiring that number days between the shoulders and the head (a and b in the diagram) must be within 50% of each other.
  5. There must be a noticeable trough between the left shoulder and the head (c). We chose an arbitrary minimum of 2%. This is measured from the left shoulder intraday high to the intraday high at the left neckline.
  6. There must be a noticeable trough between the head and the right shoulder (d). We chose an arbitrary minimum of 2%. This is measured from the right shoulder intraday high to the intraday high at the right neckline.
  7. For upward sloping necklines, the breakdown price is the the neckline value on the date of the last close.
  8. For flat or downward sloping neckline, the breakdown price is the value of the intraday low at the left neckline.
  9. The last close must be above the breakdown price.
  10. The minimum 50 day average volume must be at least 500,000. Stocks with greater liquidity are less likely to make sudden moves creating a short squeeze.
 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Trend
Dow 17511.6 -1.27% -1.75% Down
NASDAQ 4634.38 -1.48% -2.15% Down
S&P 500 2019.42 -1.24% -1.92% Down
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
S&P 500
-1.24 %
NASDAQ Composite
8.83 %
NASDAQ Composite
4.56 %
Dow Jones
-1.75 %
 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)
Sporting Activities
+ 43
Basic Materials Wholesale
+ 122
Semiconductor - Memory Chips
+ 152
Specialty Eateries
+ 186
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 ZAGG ZAGG Inc 107
Top Technical ZAGG ZAGG Inc 107
Top Fundamental ILMN Illumina, Inc. 42
Top Tech. & Fund. MWIV MWI Veterinary Supply, Inc. 28
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 NVAX Novavax, Inc. 101
Top Technical NVAX Novavax, Inc. 101
Top Fundamental CISG CNinsure Inc. 84
Top Tech. & Fund. CISG CNinsure Inc. 84
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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