Announcement: A new service, ShortsaleWatch, will debut in the next couple of days. See this week's Top Tip for further information

The three major indexes were slightly down this week and although the DJI held on by its fingernails to a positive gain of just 0.02% for the year, the others are still underwater.

The DJI is looking the healthiest of the three indexes. Although it suffered two distribution days this week (see our equivolume chart below) the DJI finished strongly helped by good news for the drug industry from the FDA. The DJI makes a clean sweep of the best performing major indexes over the last 26 weeks. Nevertheless, the DJI appears to be consolidating in the short term.

Last week we said we expected the NASDAQ to have difficulty clearing resistance at the 50 day moving average level and this was confirmed on Tuesday when a strong rally met overhead supply at that level and sellers took control causing the index to lose most of the day's gains. The downward trend continued and the index suffered a distribution day on Thursday. Light volume on Friday ahead of the long weekend saved the index from substantial further damage. February's gains have now been lost and we see further consolidation necessary before the NASDAQ is likely to make a substantial move to the upside.

This is a difficult market for breakouts to sustain lengthy gains. The best strategy is to take short term gains early and cut losses quickly. There were 40 breakouts this week with an average intraday gain of 6.2%. It is best to take that gain while it is on offer, rather than wait for the longer term gains that our expected gain model predicts, but may require considerable patience in this market. The best intraday gains this week were made by SIGM (16.4%), AMXC (15.24%), EP (14.45%). Looking back a couple of weeks, to February 1, I see that DHC has gained a mere 78%! So although the market is difficult, breakouts can still bring excellent rewards.

New Feature: ShortsaleWatch

In the next few days (maybe even by the time you read this) we will be releasing a new feature in beta test - a short sale watchlist - ShortsaleWatch

This will work similarly to our other watchlists in that an alert will be issued when a stock on the list breaks below a defined price point on heavy volume.

The watchlist will be compiled by selecting stocks that meet a specific set of criteria. These criteria are based on the guidelines offered in How to Make Money Selling Stocks Short by William O'Neil with Gil Morales, with additional requirements and constraints of my own.

The criteria for adding a stock to ShortsaleWatch will be:

A stock that was found by our algorithm and currently meets these criteria is GGC as of Friday, February 18. We see it has more than doubled in price in less than 2 years and appears to have made a climax top of $58.75 on 12/02/04. It immediately fell sharply on heavy volume to just below the 50 dma before recovery and then fell through it again. In fact the stock has crossed the 50 dma to the downside 3 times and has now recovered but turned downwards once again. A 4th cross to the downside on heavy volume would be a short sell signal.

Disclaimer: We are not recommending GGC as a suitable short sale. We are using it only as an illustration of how stocks will be selected for the ShortsaleWatch.