Market Summary

The breakoutwatch team is heading to Honolulu this afternoon for bike racing fun so our weekly commentary is foreshortened this week.

The market's fear of interest rate increases to curb inflation receded this week when comments by Fed Chairman Bernanke were taken to mean that a pause in rate increases may be near. The market can always be trusted to find something else to worry about, however, and the lift this gave the markets on Thursday was short lived. For the week, the markets gave a mixed performance with the DJI, buoyed by large cap energy stocks, scraping home for a 0.17% gain while the NASDAQ lost 0.93% and the S&P 500 closed almost flat with a 0.05% loss.

The NASDAQ Composite disappointed this week with two distribution days and a narrowly missed third distribution day on Friday as it fell again on volume only slightly lower than Thursday's. The index is under pressure as the distribution day count stands at four in the last thirteen days and one more in the next two sessions will cause our market model to signal an exit. It is just above its 50 day moving average level and could find support there early next week.

See how you could have made a 293% profit (and still counting) on just one of our stocks this year in our Top Tip of the week below.

Letting Winners Run - a work in progress

We've been noticing that there have been some stocks on our TradeWatch - Buy at Open list that have performed outstandingly this year, but that our sell model is causing us to sell them too soon. Here are some examples, but there are others:

Looking at all these situations we noticed that the when our Sell Model signaled a sell, the RS Rank on the sell date had not fallen. In other words, the stock was still outperforming the market to the same extent it was when we bought it. In the case of ERS for example, the RS Rank at breakout was 97 but when the sell signal was issued the RS Rank was 99 - in other words, compared to the rest of the market the stock was doing better than when we bought it! Here's how ERS's chart looks:

We therefore modified our algorithm to cancel the sell signal if the RS was at least as high as it had been when the stock was bought. That gave us the following results:

In other words, our average gain went from 31.3% to 131% and we got much closer to the theoretical maximum gain possible. This result is skewed of course by the outstanding results from ERS, but still more than double when ERS is excluded.

Applying the old model and the modified model to all Buy at Open stocks since the start of 2006, gives the following results:

Current Sell Model Results - Buy at Open 2006
Modified Sell Model Results - Buy at Open 2006

Note that there were 6 stocks that were no longer closed out. Because they would have been substantial gainers anyway, the effect was to increase the percentage of losing stocks. The overall effect however was to almost triple the performance of the portfolio!

Next week we'll do some more back testing to see if these results hold up over time. For the time being, the old model remains in production. Meanwhile, what do you think of this approach?

I should add that before using the RS Rank test, I used O'Neil's formula of holding for at least 8 weeks stocks that made at least 20% in the first three weeks. I didn't find that worked unless I fiddled with the 3 and 8 weeks and 20% rule. Disliking arbitrary rules anyway, I find the RS Rank condition much easier to understand.

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Investment Advisors Using our Service

TradeRight Securities, located in a suburb of Chicago, is a full services investment management company and broker/dealer. They have been a subscriber, and user, of BreakoutWatch.com for some time now. They practice CANTATA and use Breakoutwatch.com as a “research analyst”. You can learn more about TradeRight Securities at: www.traderightsecurities.com. If you’re interested in speaking to a representative, simply call them toll-free at 1-800-308-3938 or e-mail gdragel@traderightsecurities.com.

PivotPoint Advisors, LLC takes a technical approach to investment planning and management. A breakoutwatch.com subscriber since May, 2004, they use breakouts, market signals, and now TradeWatch to enhance returns for their clients. Learn more at http://pivotpointadvisors.net or contact John Norquay at 608-826-0840 or by email at john.norquay@pivotpointadvisors.net.

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