BreakoutWatch.com Weekly Review for 01/16/2010

This week we continue our investigation of the factors that contribute to a viable breakout from a cup-with-handle chart pattern. By a viable breakout we mean:

More likely than not to provide the opportunity for a gain of at least 25%
Low probability of failure (by which we mean low probability of being stopped out using an 8% stop loss).
Likely to achieve the profit objective within six months.

The methodology for obtaining the data on which we will perform our analysis was described in last week's newsletter.

Today we look at the influence of RS Rank. We remind our readers that RS Rank is a measure of how a stock has performed against all other stocks over the last 12 months with recent performance being weighted more strongly. RS Rank can take values from 1 to 99 but we only select stocks with an RS Rank of at least 70 for our cup-with-handle pattern.

We start by looking at a scatter plot of our data since 2004.

The graph clearly shows that there is a positive relationship between RS rank and subsequent performance after breakout. This is confirmed by the positive slope of the regression line through the data. The data for this plot was not filtered by volume on breakout day and therefore includes all volume levels.

We saw last week that there is a weak relationship between volume on breakout day compared to average daily volume so we will now add a filter for only those cases where the breakout day volume was greater than the 50 day average volume.

Filtered for volume at least greater than adv

We can see that the slope of the regression line has increased slightly showing that maximum gains after breakout improve if we also consider volume as a factor.

We are looking for values of our selection criteria which will give us higher probability of achieving a return after breakout of at least 25% so we next look at the mean maximum gain for each value of RS Rank.

The circles represent the mean maximum gain after breakout for each value of RS rank. The vertical bars represent the standard error in estimating the mean from our sample. Once again we have filtered the data to only include breakout days on which the volume was greater than the 50 day average.

The chart shows that RS Rank values greater than 90 give us best possibility of achieving maximum gains of 25% or more after breakout provided the volume on breakout day was greater than the average daily volume.

Best Performing Index

1 Week

13 Weeks

26 Weeks

Year-to-Date

Dow Jones
-0.08 %

Dow Jones
3.53 %

Russell 2000
22.87 %

Wilshire 5000
1.89 %

Best Performing Industry (by average technical score over each period)

1 Week

3 Weeks

13 Weeks

26 Weeks

Housewares & Accessories

Aluminum

Silver

Copper

Most Improved Industry (by change in technical rank²)

Aluminum
+ 54

Aluminum
+ 99

Long Distance Carriers
+ 213

Long Distance Carriers
+ 210

Charts of each industry rank and performance over 12 months are available on the site

# of Breakouts

Period Average¹

Max. Gain During Period²

Gain at Period Close³

This Week

11.23

8.16%

4.71%

Last Week

9.77

9.34%

2.59%

13 Weeks

165

11.77

15.07%

5.34%