Market Summary

Last week our view was quite pessimistic and we commented that the end-of-week rebound would require substantially more good news before it could be sustained. After falling further at the beginning of the week, the good news, or at least the perception of it, arrived on Wednesday when lower energy and commodity prices combined with a decline in durable goods orders to give investors some hope that inflation risks were receding. Short covering caused volume to rise and the markets recorded an accumulation day. Good economic news continued on Thursday and Friday, by which time the view of investors was that the 'goldilocks' economy - growth not to fast, not too cold but just right to avoid further inflationary pressure - was still intact. The indexes continued to recover and although we would have liked to see more volume accompanying the gains, this could perhaps be explained by the approaching long weekend. The major indexes closed higher for the first time in three weeks with the DJI gaining 1.21%, the NASDAQ Composite recovering 0.75% to once again be in positive territory for the year and the S&P 500 rose 1.04%.

We are now cautiously optimistic that Wednesday's low was the bottom of the current correction. If so we may see a follow through day early next week which will cause our market model to switch to 'enter'. Our follow through day definition requires the index to be above the 200 day moving average before confirming the rally. This requires the NASDAQ to gain another 32 points, or 1.4%, at least.

With the steep decline having driven most stocks far from their pivot points, there were just thirteen stocks that succeeded in breaking out this week and none sustained a more than 5% gain to put them out of range. If the anticipated recovery continues, then we could see a significant jump in breakouts next week.

Market Signals and The Sell Assistant

This week we examine the effects of opening and closing TradeWatch positions if the market signals are taken into consideration.

Firstly, its worth noting that in 2006, returns to date would have been improved dramatically if open TradeWatch positions had been closed immediately following the market exit signals issued on 2/2/06 and 5/10/06. This strategy would have yielded the following returns to date (click the list name to see the full history report year-to-date).

The results for this year using this strategy are quite dramatic which causes us to wonder how our back test results would be affected back to April 2003 if we recalculated them using the market enter and exit signals.

Effect of using 'Enter' Signal on Overall Returns

To determine if returns were improved if we only opened positions when the market signal (for all indexes) was at 'enter' we compared results for our Buy at Open strategy using the standard Sell Assistant model which assumes no stop loss and uses the RS Rank test to confirm a sell signal. The results showed that overall, returns were improved slightly if this strategy was used, but not sufficiently to be significant.

(The data underlying these statistics and other results to follow are available for download here).

The reason for this is two fold: there are few Buy at Open opportunities when the signal is at exit and the market signal is itself a factor in determining if the stock should be placed on the Buy at Open list.

Effect of using 'Exit' Signal on Overall Returns

To confirm if using an exit signal to automatically close all positions improved returns, we modified our Sell Assistant so it immediately closed positions at the next day's opening price when an exit signal was issued. The improvement was significant.

Effect of not using RS Rank test when signal at 'Exit'

We have shown previously (see Newsletter 5/6/06) that using the RS Rank test to override a sell signal when the market is in an uptrend can allow winners to run on to significant gains. In a downtrend however, this would not be the case because a stock could be maintaining or improving its position relative to the overall market while still experiencing a deep correction. We therefore modified the Sell Assistant to not use the RS rank test if the market signal was at exit. We found that the Sell Assistant still reacted too slowly and allowed potential gains to slip away.

Conclusions

For the Buy at Open strategy, the market signal has little effect when used to determine if a position should be opened or not.

Immediately closing a position when an exit signal is issued does improve returns. We will modify our Sell Assistant to incorporate this result effective Tuesday, May 30.

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.

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