The trend for all the major indexes remains upward as the markets climbed a 'wall of worry' beginning Wednesday in the face of considerable nervousness surrounding:

• a bailout for the bankrupt Irish banks
• international and domestic criticism of the Fed's quantitative easing policy
• Steps by China to constrain inflation
• falling housing starts
• continued weakness in housing as new starts fall, long term interest rates rise and sales and refi's head south

Despite these headwinds, the markets managed three straight days of gains which left the indexes virtually unchanged for the week. By Friday there were reasons for cautious optimism as:

• a 50 Billion Euro aid package for Irish banks appeared near
• the Philadelphia Fed reported expanding industrial activity in its region
• new jobless claims continued to improve
• retail sales showed surprising gains.

The NASDAQ Composite closed the week just below its April high. It will likely test that level again next week although low volumes during Thanksgiving week could put a brake on any significant move to the upside.

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If you are sceptical about Quantitative Easing, you will find this very, very funny: Quantitative Easing Explained

To make the Cup-with-Handle backtest tool even more realistic, I added a "transaction cost" option. If you set this to your brokerage fee and an estimated slippage amount then this will be applied to each buy and sell transaction in the simulation.

A change was also made to the implementation of the trailing stop. I found that it was being applied if the close was below the trailing stop rather than if the low was below the trailing stop.

Following last weeks progress report on how MTC stocks have fared since the introduction of the MTC criteria, someone noticed that if the trailing stop is reduced to 1% then the gains improve considerably and they questioned the accuracy of the backtest.

I replied that this result was to be expected as the effect is to take small gains often which then accumulate through compounding to give a better return. I suspected that if a transaction cost was applied, then this "churning" would reduce the gains significantly. I was wrong. Although the transaction cost does reduce the gains, the benefits of taking small quick profits are still substantial.

If you run the backtest now with the corrected trailing stop and with a transaction applied ($7.50 is the default) you will see that taking smaller profits often has significant benefits.

For example, using the default settings (8% trailing stop) for the MTC strategy over 12 months gives a return of 76.6% with eleven transactions completed. If the trailing stop is reduced to 1%, the number of transactions goes up to 29 and the profit goes up to 241%!