Weekly Newsletter 01/20/07
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Market Summary Weekly Breakout Report Top Breakout Choices Top 2nd Chances New Features Tip of the Week
Prior editions of this newsletter with our valuable Tips of the Week are available here.
 Weekly Commentary  

Market Summary

The NASDAQ Composite experienced three successive distribution days (a lower close on higher volume) this week bringing the count to five within the last three weeks and our market model consequently signaled an 'exit'. The NASDAQ lost a little over 2% for the week but is still the leading index year-to-date. The index was set back by several technology companies exceeding earnings expectations but guiding expectations lower for the coming year. It is no longer 'what have you done for me lately' but 'what will you do for me tomorrow?'. This is why technical factors, which indicate how the market values a company now, are more important than past performance represented in the fundamentals. The other major indexes ended the week little changed with the DJI adding just 0.07% and the S&P 500 slipping 0.02%.

The economic news for the week indicated that the economy is not weakening as quickly as expected. Consumer confidence is climbing due to falling gas prices, rising earnings and lower jobless claims. This is supporting prices and the CPI remained unchanged. Prospects for an early interest rate cut are now almost completely discounted and longer term bond yields have moved higher, although the yield curve remains inverted. The warm weather has helped reduce demand for oil and also supported home construction, which usually declines in cold weather. Some view these short term effects as only postponing the inevitable 'hard-landing' (see Roubini's Blog).

The market action next week will be dominated by earnings reports, which so far have been quite strong, but companies are guiding future expectations lower, so executives seem to have bought into the declining economy scenario. These kinds of forecasts tend to be self-fulfilling, so we can expect stock valuations to soften further. Our market signal is a recognition that this is happening.

However, our market signal is not infallible, as our review in this week's Top Tip shows. It may herald a steep correction as it did on last May 10, and saved our subscribers a bunch of money, or it could be a false alarm which could cause you to exit some positions that will go on to bigger gains. Over the long term it has performed well. There is clearly nervousness in the markets because of the strong gains since last August and the knowledge that the economy is slowing while inflation remains above the Fed's desired range. A pull-back seems more likely than a move upwards.

The NASDAQ did find support at the 50 day moving average level on Friday and may recover from here but another test of the 50 day moving average is likely. A break of that support level would be bearish.

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 New Features this Week Additional Value that we added this week

There were no new features added this week.

This Week's Top Tip Tips for getting the most out of our site

Market Signals Revisited

This week our market signal for the NASDAQ market reversed to 'exit'. This week we'll explain why and look at how the market signal performed over the last year and the last 5 years.

Market signals are generated by our Market Model based on distribution days and follow through days. A distribution day is one where the index closes down on higher volume than the previous day and follow through day is an accumulation day that occurs within a range of days (see below) after a market bottom. Note that our definition of a distribution day is clear cut and simple. This explains why our distribution day count on the NASDAQ this week climbed to five while a prominent investment daily only has the count at 3.

How the Market Model Works.

Each day after the market closes we look at the market movement for the day and assess whether the current signal should change.

If the current signal is 'enter', then we count the number of distribution days for each of the three major indexes over the last few trading sessions. We will issue an 'exit' signal if the number of distribution days exceeds a threshold as follows:

Distribution Day Thresholds for Exit Signals
Index
Distribution Days
No. Of Sessions
DJI
7
12
NASDAQ
5
15
S&P 500
9
18

If the current signal is 'Exit', then we look for the day on which the index set its lowest intraday low since the last exit signal was issued and closed above that low. We'll call that 'day 1' of the recovery since it closed above the lowest low. We then look for a follow through day where the index closed at least 1.5% above the close on 'day 1' and volume exceeded the previous day's volume (an accumulation day). That follow through day must occur within a certain minimum and maximum number of days after day 1 as follows:

Follow Through Day Limits
Index
Minimum Day No.
Maximum Day No.
DJI
4
7
NASDAQ
4
10
S&P 500
4
9

There is also an additional requirement that the close must be at least 0.05% above its 200 day moving average.

There is more information on how we built the model here.

How the Model worked in 2006

The model successfully avoided the large correction that began in May when it issued a sell signal on May 10. However, the requirement that a follow-through day can only occur if the index is above its 200 day moving average, meant that an enter signal was only issued on September 13, well after the market bottom. this significantly reduced the overall return and the model ended up breaking about even. The following chart shows the entry and exit points for 2006 and the returns for the index and the returns achieved if using the enter and exit signals. The 200 dma is also shown so you can see how the enter signal was delayed.

Model Performance Over 5 Years

Over the past five years the model has outperformed the NASDAQ Index by a factor of almost three:

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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 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Market1
Signal
Dow 12565.5 0.07% 0.82% enter
NASDAQ 2451.31 -2.06% 1.49% exit
S&P 500 1430.5 -0.02% 0.86% enter
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
Dow Jones
0.07 %
S&P 500
0.54 %
NASDAQ Composite
1.57 %
NASDAQ Composite
1.49 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Major Airlines Major Airlines Tobacco Products, Other REIT - Healthcare Facilities
 Most Improved Industry (by change in technical rank2)
Aluminum
+ 54
Aluminum
+ 99
Long Distance Carriers
+ 213
Long Distance Carriers
+ 210
Charts of each industry rank and performance over 12 months are available on the site

1The Market Signal is derived from our proprietary market model. The market model is described on the site.
2The site also shows industry rankings based on fundamentals, combined technical and fundamentals, and on price alone (similar to IBD). The site also shows daily industry movements.
 Weekly Breakout Report How confirmed breakouts performed this week
# of Breakouts
Period Average1
Max. Gain During Period2
Gain at Period Close3
This Week 16 26.31 1.64% -0.44%
Last Week 39 28.46 3.19% -0.26%
13 Weeks 394 29.31 12.97%
4.38%
Sector
Industry
Breakout Count for Week
DRUGS
Diagnostic Substances
2
AUTOMOTIVE
Auto Manufacturers - Major
1
BANKING
Money Center Banks
1
CONGLOMERATES
Conglomerates
1
CONSUMER NON-DURABLES
Paper & Paper Products
1
DIVERSIFIED SERVICES
Rental & Leasing Services
1
DIVERSIFIED SERVICES
Security & Protection Services
1
ELECTRONICS
Scientific & Technical Instruments
1
FINANCIAL SERVICES
Asset Management
1
MANUFACTURING
Industrial Electrical Equipment
1
MANUFACTURING
Farm & Construction Machinery
1
MEDIA
Publishing - Newspapers
1
RETAIL
Grocery Stores
1
RETAIL
Department Stores
1
WHOLESALE
Computers Wholesale
1
1The average number of breakouts in each week over the previous 13 weeks.
2This represents the return if each stock were bought at its breakout price and sold at its intraday high.
3This represents the return if each stock were bought at its breakout price and sold at the most recent close.
 Top Breakout Choices Stocks on our Cup-and-Handle list with best expected gain if they breakout
Category
Symbol
Company Name
Expected Gain1
Best Overall IGTE Igate Corporaion 100
Top Technical PRGX Prg-schultz Intl Inc 61
Top Fundamental INFY Infosys Technologies Ads 40
Top Tech. & Fund. WFR Memc Electronic Material 41
1This is the gain predicted by our Expected Gain model if the stock breaks out. Expected Gains for all cup-and-handle stocks are published on our site.
 Top Second Chances Stocks that broke out this week and are still in buyable range
Category
Symbol
Company Name
Expected Gain1
Best Overall SPTN Spartan Stores Inc 54
Top Technical SPTN Spartan Stores Inc 54
Top Fundamental BDC Belden Inc 29
Top Tech. & Fund. BDC Belden Inc 29
1This is the gain predicted by our Expected Gain model after the stock has broken out which uses the volume on breakout as a predictive term. Because the model variance is +/- 38% the expectation can be negative.

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