For new readers, we recall that we focus on the NASDAQ Composite in our weekly remarks because it is stocks listed on that exchange that deliver the best breakout performance.

Although the primary trend continues to be upwards, it is clear that the trend has weakened considerably since the last mini-rally in November. The NASDAQ Composite is again showing signs of weakness with the possibility that a head and shoulders pattern is developing. The chart shows the head and left shoulder and the right shoulder (not shown) may have been set by the intraday high on Thursday of this week. If so, then the neckline will be as shown. It will take a couple or so sessions to confirm the right shoulder but by then the neckline may have been broken which would confirm the pattern. Completed head and shoulders patterns are generally bearish, so if completed we could see the current consolidation pattern turn into a correction. This would be confirmed with a break of the 50 dma line and a failure of support at 2114.

The chart also shows how average volume has declined since November as daily volume has been below average everyday, with only one exception on December 4. Although low volume is considered a sign of a technically weak market, the lack of volume makes it difficult to assess the strength of a move in either direction.

Our Zacks Strong Buy backtest data has been updated with the latest available data from Zacks. The data is now current through November 13, 2009.

A winning strategy: HTF breakouts and Zacks Strong Buy (ZSB)

Back in May, we introduced a new watchlist based on stocks that have a "Strong Buy" rating from Zacks Investment Research. Backtesting a strategy of buying breakouts from our cup-with-handle watchlist as they broke out and then selling when they lost their Zacks "Strong Buy" ranking showed very impressive returns of over 1000% since 2003. We wrote about this strategy in detail in our white paper "Earnings Revisions and Cup-with-Handle Breakouts: A Rewarding Combination".

Since the introduction of the strategy, we have been somewhat disappointed in the performance of ZSB breakouts from the cup-with-handle pattern. In fact, they have generally performed poorly showing a "pop" on breakout day but poor performance thereafter. In contrast, ZSB breakouts from the High Tight Flag (HTF) pattern have done extremely well, provided a tight stop loss strategy was followed.

As we know, volatility was high for much of the year as nervous traders and investors were quick to open positions for fear of missing the new bull market but were quick to close their positions for fear of being caught by a failed bear market rally. In this volatile market, the use of tight stops was essential to turn a profit. We can demonstrate this with the help of or ZSB backtest tool.

Chart1 shows the results of applying our ZSB strategy to HTF breakouts this year using a stop loss of 3% from the buy price as recommended in our white paper. No trailing stop was used. The chart shows that the strategy beat the S&P 500 by a factor of over 3.

Chart 1: HTF ZSB Breakouts 2009 - No Trailing Stop