Market Summary

The markets gave up their recent gains this week as all three of the major indexes retreated. The DJI lost 0.78%, the NASDAQ Composite lost 0.32% and the S&P 500 gave up 0.63%.

For the DJI, this was the second successive week of losses with weekly volume rising so this counts as a distribution week for the Dow. A look at the daily chart shows that it fell through support on Friday but is at the lower Bollinger Band, so we may see a recovery next week. If not, then we could see the DJI fall to the next support level at the former resistance level of about 10,400.

The NASDAQ suffered its first loss in 6 weeks but volume was lower than last week The index experienced only one distribution day, on Wednesday, which was only the second over the last 20 sessions, as shown by our equivolume market chart (equivolume charts display price and volume action together on a single chart with the width of the bar being proprtional to the volume. Together with the annotations we apply, they are an excellent overview of market trends):

The S&P 500 is performing similarly to the NASDAQ Composite. This was the first down week out of the last the last six.

In summary, the large cap industrials, that are most sensitive to energy costs, are continuing to weaken, while the broader markets are still consolidating.

There were 44 confirmed breakouts this week coming again from energy, oil and gas and healthcare sectors, which have led the breakout count for most of the year. There were few spectacular breakouts, with all of them closing within +/- 5% of their pivots except for MFLX (Multi-Fineline Electronix) which gapped-up on Thursday on better than expected earnings after 6 handle days of above average volume gains, and rose to 16.14% above its pivot before closing for a 12.32% gain. It went on to gain another 4% on Friday to close the week for a gain of 16.55% over its pivot.

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Backtesting On Breakout and After Breakout Strategies

One of the most appreciated features of breakoutwatch.com is the ability for subscribers to set filters on watchlists so they will only be alerted when a stock meeting their personal preferences attempts to breakout. We recently described how our backtest feature allows you to optimize your filter selections in our newsletter of 6/18/05. Since then we've made several enhancements to this feature which make it even more useful, whether you trade when receiving a breakout alert or wait until the breakout is confirmed.

Firstly lets review how to use our filters. Filters can be set on any watchlist parameter and the logic to be used (either '>=' or '<=' ) is toggled by clicking on the logic operator. Here's an example:

These filters can then be saved by clicking the 'Save' button and then only stocks meeting the filter criteria will be shown on the watchlist and you will only receive email alerts on stocks meeting the filter criteria.

To see how stocks meeting your criteria have performed recently, click the backtest button, and you will see a pop-up like this:

You can set the number of days over which you want to backtest (65 is the default corresponding to the most recent 13 weeks of trading - fairly representative of recent market conditions). Since breakout volume and breakout day gain are not known before breakout, leave them blank if your investment style is to buy on the day of breakout.

Clicking 'Go' will quickly give you the breakout performance of your filters compared to all breakouts over the chosen period. Here's the result, showing how the filters improved the return over all breakouts, and the filters that were used:

Now we see that our filters selected stocks that performed 50% better than the average over the 13 weeks. (That includes losses of 8% on 4 stocks that failed to reach at least 5% after breakout.) Since many stocks will not have reached their peak in this time period, this is just an indication of how well they will go on to perform.

If we prefer to buy when the breakout is confirmed, we can add additional backtest criteria. For example, set the breakout day volume to be at least 2.5 times average daily volume as at left and the result will be:

 

 

We can see that we will have fewer stocks to select for purchase, but our potential return has improved.

Finally, we can also see how breakouts perform when we select only stocks that also gained at least 5% on breakout. (We could also have dropped the volume constraint).

 

 

The filters and and additional breakout day values shown are for illustration only. Although the results shown are real, they are not necessarily the optimum values, either for filter selection or for breakout day values. But they do demonstrate the power of filters especially when combined with our backtest functions.

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