Market Summary

The markets continued a steady march forward this week with four consecutive days of gains halted by profit taking on Friday following the release of data that showed inflation was still a threat and consumer spending had fallen sharply in August. The DJI closed the week 1.5% higher, The NASDAQ Composite continued to outperform with a 1.8% rise and the S&P 500 gained 1.6%. Although economic news played a role, which we will discuss shortly, the main factors moving the markets higher were technical as investment managers sought to 'window-dress' their portfolios at quarter's end and interest was heightened by the DOW's intra-day cresting of its all-time highest close.

The Chicago and Richmond Federal Reserve Regions reported higher manufacturing output this week offsetting the downturn reported from the Philadelphia Region last week. There is no clear consensus at the moment as to the extent of slowing in the economy, and with gas prices falling and consumer confidence rising, we may see the economy continue to perform well. This will present a conundrum for the Federal Reserve because the current assumption is that inflation will fall as the economy slows. However, Friday's core personal consumption expenditure price index (the key inflation gauge followed by the Federal Reserve) showed a year-on-year gain of 2.5%, the most since January 1995 and well above the Fed's target of 2% or less. We will get an indicator of the strength of the economy as soon as Monday of next week when the Institute for Supply Management's reports the September index of U.S. manufacturing activity. The forecast is for a reading of 53.5 in September, compared with 54.5 in August.

We used the phrase 'steady march' above and this was suggested to us as we looked at a weekly chart of the NASDAQ Composite, which shows a remarkably consistent series of large steps forward followed by small consolidation steps sideways since the middle of July. The index shows an ascending channel and seems on track to test resistance at its year's high of 2375. Based on the alternating weekly trend, we can expect some consolidation next week. A break to the upside of the channel, or to the downside would break the trend.

Correction to Tradewatch Buy at Open Simulations back to 2003 - Return Reduced to 750%

I am grateful to a newsletter reader for finding an error in the trade data we published last week supporting our portfolio simulation back to April, 2003. As a result, I found two sources of error in the logic used for the simulation. Both were related to the way multiple open positions for the same symbol were treated. The effect was to slightly reduce the overall return to 750% and to change the conclusion as to which tie-breaker was the best. The recommendation now is:

• Use a portfolio size of 4 positions
• Use Expected gain as the Tie-breaker if you have more than one Buy at Open choice
• Allow your position size to grow as your available cash grows.
• Do not enter a buy order if any market signal is at 'exit'.

The data reported last week has been corrected in the Newsletter Archive and is available here, along with the detailed supporting trades.

This tool is still undergoing testing and enhancement. It is available to all subscribers and guests and you can test the tool here. I encourage you to try different options, and if you find any errors then please let me know. Also, let me know what you think of this tool and how to improve it.

Other things we are working on

Head and Shoulders Tops and Bottoms are two of the most reliable trend reversal patterns. With the help of subscriber David C. we are developing a TradeWatch module to identify the H&S Top characteristics that will offer a 'Short at Open' daily list. This will be accompanied by a 'Cover Assistant' ( a Sell Assistant in reverse) that will advise when to cover these trades.

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.

Note to advisors: If you would like to be listed here, please contact us. As a service to those who subscribe to us, there is no additional charge to be listed here.