|Weekly Newsletter 03/06/15|
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|Prior editions of this newsletter with our valuable Tips of the Week are available here.|
The major indexes lost ground this week mainly due to Friday's distribution day as investors feared a sooner than expected interest rate hike. This seems like an overreaction as the expected interest rate increase is several months away and will inevitably be incremental. Market always over-react to seemingly apparent bad news so let's not behave as though the sky is falling. The NASDAQ chart shows where support lies, which is still historically a pretty good level.
|Weekly Breakout Report|
The number of breakouts rose from 22 to 25 this week. Interestingly, the two top performers on breakout were head and shoulders bottom stocks with wildly divergent RS Rank values. PBYI had an RS Rank of 98 while STAA had a lowly RS Rank of just 4. We have consistently recommended choosing stocks with an RS Rank above 92 so what explains this dichotomy? We'll examine this in our Top Tip below.
|New Features this Week||Additional Value that we added this week|
Indicator Added to Alert Monitor
Last week's newsletter showing that cup and handle pattern stocks (CWH) within 95% of the breakout price have a 90% chance of successful breakout was met with interest and a request that I add an indicator to the Alert Monitor to designate such stocks. This has been done. These stocks are flagged with an asterisk (*) next to their RS Rank.
Not surprisingly though, you will find that 90% of the stocks on the alert monitor that come from a CWH pattern are flagged.
|This Week's Top Tip||Tips for getting the most out of our site|
An In-Depth Look at the Calculation of RS Rank
Our two top performing stocks this week had RS Rank values of 4 and 98. Both stocks broke out from a head and shoulders bottom pattern (HSB). Since this pattern applies to stocks that are just recovering from a deep decline, how could one of them have an RS Rank of 98? A quick look at the chart for PBYI gave me the answer so I thought I would use it as a way to illustrate how RS Rank is calculated
Firstly, consider how the RS Rank value is calculated:
Raw RS Rank = 12 month Weighted Price Change
= (Price change this quarter * 40%)
+ (Price change 1 qtr ago * 20%)
+ (Price change 2 qtrs ago * 20%)
+ (Price change 3 qtrs ago * 20%)
(Note that the price change three quarters ago counts for 1/5 (20%) of the weighting.)
The raw score is then ranked against the raw score for all other stocks and a final RS Rank in the range 1-99 is calculated
Now look at the 12 month chart for PBYI
We can see that although the the price was dropping over the last two quarters, ending in a HSB pattern, the price was almost 4 times higher than 3 quarters ago and double compared to 4 quarters ago.
The Raw RS calculation for PBYI is then
Let's compare that to the Raw RS for NASDAQ Composite as we don't have an index for all stocks
So the Raw RS Rank for PBYI is substantially higher than for the NASDAQ as a whole. You can therefore see why PBYI would rank at 98 when ranked against all other stocks. However, note that before the turn up, PBYI would still have had a very high RS Rank, so RS Rank does not always indicate a stock is moving higher. At its lowest close on January 6, the RS Rank was still a very high 97.
The Interpretation of RS Rank
Our RS Rank compares a stock's performance over 12 months to all other stocks in our database (approx. 6,000). In general a high RS Rank denotes a stock is performing well, but as we have seen, a falling stock may still have a high RS Rank. What is important is that RS Rank be improving. This will usually be the case for our 'long' patterns.
So, don't rely solely on RS Rank as an indicator of possible future performance, always look at the chart as well.
|Market Summary||Overview of market direction and industry rotation|
|Top Breakout Choices||Stocks on our Cup-and-Handle list with best expected gain if they breakout|
|Top Second Chances||Stocks that broke out this week and are still in buyable range|
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