Weekly Newsletter 01/30/15
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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 NASDAQ Composite continues to consolidate, trading within a range shown on the chart below. Volatility is high reflecting the uncertainty in earnings reports, the Eurozone and the impact of falling oil prices.

The extent to which daily volatility has increased is reflected in the height of the candlesticks. Notice how the height in the last two months has increased compared to the period from mid-October to the end of 2014. This high volatility can be good for day traders but swing traders can be easily burnt.

NASDAQ Composite
 Weekly Breakout Report  

The number of breakouts fell to 18 this week compared to 30 a week ago. The top two performers had RS values of 95 and 91 respectively which is consistent with our long held view that an RS Rank above 90 improves the probability of success.

Of the 18 breakouts, 7 were under water at Friday's close illustrating my point above that the volatility we are seeing can be good for the day trader but if hold for more than a day or two you can be burned.
 
Breakouts for Week Beginning 01/26/15
Brkout Date Symbol Base Squeeze BrkoutOut Price Brkout Day Close Last Close Current % off BOP Gain at Intraday High
01/26/15 MDGN CwH N 7.12 7.85 8.3 16.57 16.57
01/28/15 MRCY CwH N 14.74 15.33 15.78 7.06 10.65
01/26/15 DEG CwH N 19.56 20.74 20.69 5.78 8.33
01/26/15 CSTE DB N 61.15 63.25 62.1 1.55 3.94
01/30/15 HP HSB N 57.70 59.56 59.56 3.22 3.22
01/26/15 SKYW CwH N 13.37 13.78 12.55 -6.13 3.07
01/27/15 DRNA HTF N 21.09 21.71 21.32 1.09 2.94
01/27/15 ZIOP HTF N 8.87 8.93 8.95 0.90 2.37
01/26/15 LZB SQZ Y 27.46 27.98 26.69 -2.80 1.89
01/29/15 CBT HSB N 42.36 43.12 42.41 0.12 1.79
01/26/15 ZFGN HTF N 40.15 40.36 38.01 -5.33 1.72
01/29/15 CEMP HTF N 27.75 27.97 27.74 -0.04 0.79
01/28/15 ENDP CwH N 81.04 81.20 79.61 -1.76 0.74
01/28/15 GCA HSB N 6.83 6.87 6.61 -3.22 0.59
01/26/15 AMT DB N 101.47 101.76 96.95 -4.45 0.4
01/30/15 LEA CwH N 99.99 100.35 100.35 0.36 0.36
01/30/15 FAZ HSB N 14.64 14.68 14.68 0.27 0.27
01/26/15 MSTR SQZ Y 168.11 168.3 161.6 -3.87 0.11
Weekly Average (18 breakouts) 0.52 3.32

 
 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

Why stocks with an RS Rank > 90 have a Higher Probability of Success

To illustrate the RS Rank > 90 recommendation, I return to an analysis published in July, 2013

From the earliest days of our website, I found that RS rank was highly correlated with performance after breakout. In 2010 I studied the evidence for why this is so in more detail and present it again for our new readers.

RS Rank can take values from 1 to 99 but we only select stocks with an RS Rank of at least 70 for our cup-with-handle pattern and publish only those with an RS >= 80 . Looking at our data since 2004 we can see how stocks in each percentile performed. The chart below shows the mean performance after breakout for each RS percentile measured from breakout price to highest gain after breakout.

Max Gain vs RS Rank

The graph clearly shows that there is a positive relationship between RS rank and subsequent performance after breakout. This is confirmed by the positive slope of the regression line through the data. The data for this plot was not filtered by volume on breakout day and therefore includes all volume levels.

The next chart shows the spread around the mean of the highest gains for each percentile. The circles represent the mean maximum gain after breakout for each value of RS rank. The vertical bars represent the standard error in estimating the mean from our sample. If we are aiming for a gain of 25% after breakout, we can see that its only RS values in the range 90 to 96 that consistently produce  the target return. Interestingly, it seems that RS values above 96 perform only at an average level, indicating that these stocks are perhaps overvalued with less potential for further gains.
 
mean max gain vs RS Rank

Conclusion

While breakouts from a cup-with-handle base can perform well on average, the best potential for highest gain comes from stocks in the 90-96 range.
 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Trend
Dow 17672.6
-2.87% -3.69% Down
NASDAQ 4757.88 -2.58% -2.13% Down
S&P 500 2051.82 -2.77% -3.10% Down
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
NASDAQ Composite
-2.58%
NASDAQ Composite
0.10%
NASDAQ Composite
6.49%
NASDAQ Composite
-2.13%
 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 Toy & Hobby Stores
 Most Improved Industry (by change in technical rank2)
Music & Video Stores
+ 59
Music & Video Stores
+ 99
Semiconductor - Memory Chips
+ 163
Grocery Stores
+ 164
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 ORPN Bio Blast Pharma Ltd. 100
Top Technical ORPN Bio Blast Pharma Ltd. 100
Top Fundamental CBPO China Biologic Products, Inc. 38
Top Tech. & Fund. CBPO China Biologic Products, Inc. 38
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 SKYW SkyWest, Inc. 51
Top Technical LEA Lear Corporation 27
Top Fundamental LEA Lear Corporation 27
Top Tech. & Fund. LEA Lear Corporation 27
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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