Breakoutwatch.com Reviewed in Stocks & Commodities Magazine

Technical Analysis of Stocks & Commodities magazine editor, Jayanthi Gopalakrishnan, reviewed breakout watch.com for the June issue of the magazine. You can read the review here.

Market Summary

The markets seem to have decided that with inflation contained, the continuing rise in oil prices is not the impediment to corporate profits that it was once thought to be. The major indexes gained ground on each day this week on improving volume. The NASDAQ Composite recorded 3 accumulation days and gained 1.31% as it continued to work its way up the right side of the handle we identified last week. The DJI gained 1.05% and the S&P 500 performed best with a 1.57% gain to close in positive territory for the year to date, a position it reached only briefly in early March.

The NASDAQ continued to meet resistance at just below 2100, which we identified as the pivot of its current CwH formation last week. The index has been building volume each day, but hit strong resistance as it approached that level in early trading on Friday and fell into negative territory before showing resilience to close higher. A sustained breakout above 2100 on stronger volume could be significant for the tech. heavy index.

Last week we said "The S&P 500 is in a head and shoulders pattern, which is usually bearish. The index needs to rally above the neckline at 1210 before there can be confidence that the broader market is showing strength." The 1210 level was broken on Thursday and the index continued to move higher on Friday confirming the neckline breakthrough. This is a positive development as the S&P 500 is considered to be the broadest measure of the market's strength.

Breakouts

The number of breakouts is a measure of the market's strength so with the markets gaining ground each day, it is not surprising that the number of breakouts increased from 31 to 54 this week. CONN recorded the strongest performance of the week when it broke out of a 3 month CwH base on Monday on 8 times average volume and went on to close the week 17.9% over its pivot after reaching an intraday high of 22.59%. BBY (Best Buy) gapped up by more than 5% at the open on Tuesday, also on 8 times average volume, and reached an intraday gain of 16.14% on Wednesday before closing the week at 14.28% above the pivot. Exceptionally strong breakouts like BBY that gap up are not subject to the usual guideline of not chasing a stock more than 5% above its pivot point. In all 22 breakouts gained more than 5% in intraday trading and 13 closed the week with a gain of at least 5%.

There were no breakdowns this week.

Optimizing Filters

Don't miss our Top Tip this week to learn how to optimize your filters and have a chance to win a 3 month Platinum subscription.

Optimizing your Filters

This week we introduce what is possibly one of the most valuable additions we have ever made to the site - the ability for you to personally tune your filters to the current state of the market and your own trading style. Whether you want to make quick gains on the day of the breakout, or are willing to wait for longer term gains, our backtest facility allows you to find a set of filters to improve your returns.

Here's how it works. We added a couple of new buttons to the Filters area of the CwHWatch display as follows:

To demonstrate how it works, Let's look at the results from entering the filters I suggested in last weeks newsletter, which were:

Clicking the Back Test button pops-up the following display (as of market close on Thursday, June 16)

This display compares the performance of breakouts selected by our filters to all the breakouts over the last three months. Three months is chosen as a reasonable period over which to gather some meaningful statistics, but short enough to be relevant to the current market conditions.

It shows us that on the day of the breakout, our filters do a good job of selecting stocks that beat the overall averages, but they do not do a good job of picking stocks that went on to achieve the best intraday highs. (To review the methodology used, click the Backtest Methodology button on the image above).

To improve our longer term performance, we can modify the filters. Let's start by setting the expected gain to 0. The results now are:

We can see that we reduced our breakout day margin of success but did better over the longer term (see footnote). By successively fine-tuning your filter criteria, you can find the optimum set of filters for your trading style. When you've finished, click the save button to save your filters.

You can refine the stocks selected by your filters still further by creating a Personal Watchlist. Just remember to specify if you want your email alerts to be based on your filters or your watchlist.

To add to the fun, we are announcing a .....

Filter Competition

Two 90 day Platinum subscriptions will be awarded to the subscribers who develop the set of filters that produce the best breakout day close returns and best longer term gains based on the filters that they have saved as of midnight EST on June 30. So our Silver and Gold subscribers get to play along, we will allow them access to the filter functions from midnight EST on Friday, June 24 through to midnight on Thursday, June 30.

We will take all the saved filters as of June 30 and run them through the backtest program to select the set of filters that produces:

1. The largest positive variance in the 'Average Gain at B/O Day Close' column
2. The largest positive variance in the 'Average Max Gain since B/O'' column.

In the event of a tie, the 90 days will be divided between the winners. Winners will be notified by email and the winning filters will be announced in the newsletter of Saturday, July 1.

Footnote

The example given raises the question: why was medium term performance worse when using the Expected Gain filter value recommended last week? There are several possible explanations:

1. The Expected Gain model has not been re-calibrated this year and may not be applicable to market conditions over the last 3 months.
2. The Expected Gain model is based on performance over a longer term than 3 months.
3. The methodology used for determining the highest intraday price post breakout is different in the backtest program from that used when calibrating the Expected Gain model.