Weekly Newsletter 02/20/15
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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 posted its eighth straight day of gains on Friday. It closed at 4956 leaving it just 2% short of its March 2000 high of 5049. With a gain of 1.3% for the week it doubled the gains of the other two major indexes but volumes remained well below the 50 day average. The low volume was mostly attributable to uncertainty over the Greek bailout. That should be resolved now there is a 4 month draft deal in the works, so volumes should improve next week and the rally should continue although the some resistance may be met at 5049.

NASDAQ Comp.
 Weekly Breakout Report  

There were just 11 breakouts this week with the number kept low by the shortened week but mainly by  the low volume levels, because we need a 1.5 times average 50 day volume to declare a breakout on all patterns except the High Tight Flag. We explain that pattern further below.

Breakouts for Week Beginning 02/16/15
Brkout Date Symbol Base Squeeze BrkoutOut Price Brkout Day Close RS Rank* Last Close Current % off BOP Gain at Intraday High
02/20/15 HZNP CwH N 17.55 18.53 96.00 18.53 5.58 7.98
02/17/15 CEMP HTF Y 27.97 28.28 99.00 29.61 5.86 5.86
02/18/15 BV CwH N 8.73 9.04 91.00 9.24 5.84 5.84
02/19/15 FRGI CwH N 64.33 66.99 93.00 64.96 0.98 4.13
02/18/15 WCG CwH N 82.35 83.12 88.00 84.62 2.76 2.76
02/19/15 CRAI DB Y 30.99 31.21 84.00 31.82 2.68 2.68
02/18/15 ARMH CwH N 50.41 51.40 83.00 51.68 2.52 2.52
02/19/15 FB DB N 78.00 79.42 75.00 79.9 2.44 2.44
02/19/15 AMAT CwH N 24.67 24.93 80.00 25.13 1.86 1.86
02/20/15 EGL CwH N 48.06 48.38 86.00 48.38 0.67 0.67
02/18/15 VEEV CwH N 30.97 31.00 91.00 30.58 -1.26 0.1
Weekly Average (11 breakouts) 2.72 3.35
*RS Rank on day before breakout.
 
 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

High Tight Flag: Rare but is it Profitable Compared to Cup and Handle?

CEMP broke out from a High Tight Flag (HTF) pattern this week and gained 5.9% until Friday's close. The stock also happened to be in a volatility squeeze before breakout, which may have helped it pop.

In How to Make Money in Stocks, William J. O'Neil identified the High, Tight Flag pattern as rare but potentially highly profitable. In his Encyclopedia of Chart Patterns, (John Wiley and Sons, 2000) Thomas Bulkowski found they were not so rare but also very profitable, provided you waited for the breakout to enter the trade. When we introduced the pattern in 2007, our analysis at the time confirmed Bulkowki (see Newsletter for 12/29/07 ).

Looking back at that analysis now, I see that it was flawed because I only considered the maximum gain after breakout, without considering any drawdown.

I've taken another look at the performance of HTF breakouts during 2014. It was a strong year for breakouts so if the HTF pattern is profitable, we should see it then. I considered performance over 7-14 days which is the  typical period for a swing trader. I didn't consider the day trade situation, or the buy and hold performance. During 2014, there were 56 HTF breakouts.

After 7 days, with no stop loss, the average gain from breakout price was -0.6% with a maximum drawdown of 35%
After 14 days, with no stop loss, the average gain from breakout price was -3.4% with maximum drawdown of 35%

After 7 days, with a 7% stop loss, the average gain from breakout price was 1.7%
After 14 days, with a 7% stop loss, the average gain from breakout price was -0.2%

So while eventual gains might be quite strong, it is unlikely that a trader would have held the position long enough to make an acceptable profit.

When we compare that to the cup and handle pattern we get a much better result. During 2014, there were 686 CWH breakouts.

After 7 days, with no stop loss, the average gain from breakout price was 3.1% with a maximum drawdown of 48%
After 14 days, with no stop loss, the average gain from breakout price was 3.2% with maximum drawdown of 48%

After 7 days, with a 7% stop loss, the average gain from breakout price was 3.4%
After 14 days, with a 7% stop loss, the average gain from breakout price was 4.0%

Now, it may be that HTF positions still held after 14 days may go on to be more profitable than CWH positions but that will require a more detailed analysis.

Conclusion

  1. For the swing trader, the cup and handle pattern is substantially more profitable on average than the high tight flag pattern.
  2. For the swing trader, it is important to apply stop loss factors. Over 14 days, the average profit for the CWH patter was 4.0% when a 7% stop loss was used compared to 3.2% without a stop loss. That's a 25% improvement.

 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Trend
Dow 18140.4 0.67% 1.78% Up
NASDAQ 4955.97 1.27% 4.64% Up
S&P 500 2110.3 0.63% 2.5% Up
lthough nt t

13 Weeks 26 Weeks Year-to-Date

NASDAQ Composite
5.16 %
NASDAQ Composite
8.75 %
NASDAQ Composite
4.64 %


3 Weeks 13 Weeks 26 Weeks

Toy & Hobby Stores Toy & Hobby Stores Toy & Hobby Stores


Textile Industrial
+ 53
Semiconductor - Memory Chips
+ 173
Grocery Stores
+ 173


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 PGNX Progenics Pharmaceuticals Inc. 112
Top Technical PGNX Progenics Pharmaceuticals Inc. 112
Top Fundamental VDSI VASCO Data Security International, Inc. 52
Top Tech. & Fund. VDSI VASCO Data Security International, Inc. 52
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 VEEV Veeva Systems Inc. 52
Top Technical EGL Engility Holdings, Inc. 32
Top Fundamental VEEV Veeva Systems Inc. 52
Top Tech. & Fund. FRGI Fiesta Restaurant Group, Inc. 44
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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