Market Summary

The major indexes consolidated their gains of the first week of the year and the current rally remains strong despite some profit taking this week after the indexes set new four-year highs. There were some early earnings disappointments which gave investors pause but the markets continue under accumulation. We have not seen a distribution day so far this year. The DJI was virtually unchanged with a small 0.01% gain while the NASDAQ added 0.5% and the S&P 500 gained 0.17%. The NASDAQ looks particularly well positioned from a technical perspective as it continues to ride above the rising wedge we discussed last week.

The markets are closed on Monday and when they open on Tuesday investors will focus on earnings reports and the interest rate outlook. The consensus among analysts appears to be that earnings will need to be above expectations for the markets to move higher than their present levels. Analysts also generally agree that the Fed will raise interest rates one more time in January but investors will be watching for confirmation that the Fed will pause interest rate increases at their March meeting. Any indications to the contrary could cause a pullback

The number of breakouts fell back this week as last weeks euphoria abated somewhat. The number was still well above the 13 week average though and the average gains by week's end were just over 2% and 6.6% for the year, comfortably beating the major indexes. Our new premium service TradeWatch Best Return stocks are up 8.3% over the suggested buy stop price and 10.8% above their breakout price.

The Oil & Gas sector continues to be very active with seven breakouts coming from that group this week.

Machinery Construction/Mining continues to be the top ranked industry by our technical criteria while Energy-Other Sources is the most improved industry gaining 50 places in our technical rankings.

Should You Sell an Unconfirmed Breakout?

Each day we send out alerts on stocks on our watchlists that are attempting to breakout. A breakout attempt occurs when a stock meets or exceeds its pivot price and the projected daily volume is at least 1.5 times average daily volume (ADV). At the end of the day we report all breakout attempts that were confirmed, that is, they stayed above their pivot price and volume was at least 1.5 times ADV. The question arises as to what to do when you have purchased a breakout attempt but it was not confirmed at the end of the day.

Often a stock will continue to perform well, even though a breakout was not confirmed. An example is ATLS which attempted to break out from a cup-with-handle pattern on November 11, 2005. The breakout was not confirmed but ATLS went on to gain 40%. A review of the chart shows what happened:

Because a new pivot was set while attempting the breakout on 11/17 the stock was dropped from the CwH watchlist. If it had then formed a new handle then it would have reappeared on the list. In this case, however it hardly paused for breath before making a substantial run.

The question then arises, if you had bought ATLS on 11/17 because you received our email alert, should you have held on or sold it when we reported that the breakout had failed?

A breakout can be unconfirmed because it fails on price (FP), meaning that it does not close at or above its pivot price, fail on volume (FV), meaning that the volume was not at least 1.5 times its ADV, or fail on both. We looked at all stocks that attempted to breakout but failed since April 2003. We classified them as a success if they went on to gain at least 5% over their pivot price and a failure if they fell to 8% or more below their pivot price. Here's what we found.

So in all cases, the odds are in your favor that the stock will still go on to make at least a 5% gain, with a failure on volume presenting the best opportunity.

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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.