Market Summary

The middle-east crisis increases the potential for disruption to energy supplies and the commodities markets reacted accordingly with crude oil futures reaching record heights this week. While higher oil prices have not yet had a significant impact on the economy, sooner or later higher energy costs will reduce consumer disposable income and hurt economic growth. Reduced consumer demand could itself be a brake on inflation, but if higher energy costs are passed on through the cost of goods and services, inflation will rise and the Fed will be forced to take further fiscal tightening measures because with the underpinnings of the economy dependant on debt financing from overseas, the Fed cannot afford to relinquish its strong anti-inflationary stance. There was evidence that consumer spending is already being impacted as retail sales for July came in below expectations on Friday and consumer confidence dipped. The markets recognized these realities this week and closed sharply down for the second successive week. The DJI lost 3.17%, the NASDAQ Composite plummeted 4.35% and the S&P 500 dipped 2.31%. Only the DJI remains in positive territory for the year with a gain of just 0.2% while the S&P 500 has lost 0.97% and the NASDAQ has given up 7.62%.

We recommended going to cash on May 10 and since the open on May 11 the DJI has lost 8%, the S&P 500 has lost 7% and the NASDAQ has dropped 14%. The rally that began on June 14 is now definitely over for the NASDAQ while the DJI and S&P 500 are still above the intraday low of that date.

The DJI broke through the neckline of a head and shoulders pattern on Wednesday as the following chart shows. This is a bearish pattern and the expectation is that the decline will continue from the point where the neckline was broken by an amount equal to the height of the head above the neckline. As the head was 3.5% above the headline, that gives us a target level for the DJI of 3.5% below 11013 which is 10628, or 70 points below the June 14 intraday low. That would correspond to a 9% decline from May's high but 5% above last November's low and qualify as a correction but would be well short of confirming a bear market.

There were 16 successful breakouts this week which made an average intraday gain of 4.11%. The best performer was FIZ which gained 11.35% before closing the week for a gain of 7.13%.

Work-in-Progress

There's no Top Tip this week as we are actively working on recognition of head-and-shoulders chart petterns. These are a highly effective selector of shorting candidates. We hope to have a preliminary version ready next week.

A Name for our Methodology

We started our site in October 2001 and based our methodologies on the writings of William O'Neil in his book "How to Make Money in Stocks". In developing the computer algorithms that drive the site, we found it necessary to make adjustments to the often subjective prescriptions of Mr. O'Neil and from the outset we departed from his prescriptions in a number of important ways. For example, we

• used only objective criteria and quantified the degree to which a stock met the guidelines. To do so we developed new metrics we called CET and CEF that were separate measures of a stock's technical and fundamental strength
• developed objective market signals
• emphasized that technical strength is more important than fundamental strength and published our research to support this conclusion
• provided an array of technical analysis tools through our TA Charts service
• developed new metrics to assess the quality of a cup-with-handle base and improve the chances of selecting a successful breakout on any given day
• provided stock and market timing aids through email alerts, the Alert Monitor, Market Signals and the Sell Assistant
• provided verifiable performance statistic's showing the degree of success of our methodologies.

We are proud of this track record and when we analyze the enhancements we have made, we see that we have added the important elements of Technical Analysis and Timing Assistance to the original approach. We have concluded it is time to give our methodologies a name of their own and we have chosen CANTATA^SM. Henceforth this is the name we will use to describe the services delivered through the breakoutwatch.com site. Apart from the fanciful attraction of the name as an acronym, we also found a dictionary definition that seemed most apt:

Cantata - a musical composition for voices and orchestra based on a religious text

Speaking of music, we received the following email from a subscriber which was music to our ears this week:

Mike,
Hi, I'm just writing to thank you for the accuracy of the market timing signals on the site. The NASDAQ exit signal has saved me about $10000 so far. I'm pretty sure it's easier for you to sell subscriptions when the market is going up, but your service is even more valuable to me when the market is going down. I hope some day to be able to meet you & thank you in person.
Thank you,
GB

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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