BreakoutWatch.com Weekly Review for 05/21/2011

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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

Last week I said "a fall through support line B would signal weakness and a failure to find support at ascending triangle A would be distinctly bearish". In fact, support line B was breached as early as Monday of this week and the index then bounced around line B with that prior support level now posing resistance. Friday's distribution day left the index well below support line A, so we must conclude that a correction will follow, at least down to Tuesday's low of 2760.

NASDAQ Composite

The number of successful breakouts fell to 7, reflecting the negative short term trend. The average gain of breakouts for the week was 5.1% but this was distorted by Red Robin Gourmet Burgers (RRGB) which gapped up on Friday for a gain of 17.9%.

New Features this Week

Additional Value that we added this week

No new features this week.

This Week's Top Tip

Tips for getting the most out of our site

Progress Report on Trend Reversal Model

Several weeks ago (Newsletter 04/01/11) we analysed the value of using follow through days as a reliable predictor of a downward trend reversal. We concluded that using that indicator, you would have missed 45% of the trend reversals over the last five years and so we began a search for a better indicator.

I started with the Stochastic RSI which a price-based indicator used to determine overbought and oversold levels with more frequency than the standard RSI. To this I added the Accumulation/Distribution (AccDis) indicator which is volume based. The rationale was to combine the two to derive an indicator in which price trend reversals were confirmed by an increase in volume. While this approach certainly held promise, I found that the results produced whipsawing due to the frequency of the overbought/oversold indicators produced by the Stochastic RSI.

The next step was to slow down the signals by smoothing them with an exponential moving average. The advantage of an exponential MA (EMA) over a simple MA (SMA) is that it gives more weight to recent data whereas the SMA gives equal weight to all days in the chosen period. This now raised the question of what period and what weight to give to the EMA for the Stochastic RSI and AccDis.

Testing various values over the last five years for the DJI, S&P 500, and NASDAQ showed that the degree of smoothing necessary was dependant on the volatility of the index. A high volatility index such as the NASDAQ required more smoothing than a low volatility index such as the DJI or S&P 500.

This suggested that the next step should be to combine volatility into the formula in some way. The usual measure of volatility is the 'beta' value for a stock which compares the volatility of the stock to the volatility of the underlying market.

Our goal now is to have an indicator which will flash buy/sell signals for each stock based on its beta value. That still requires more work but already we can see that the indicator for each index will outperform our current market trend model. The table below shows how the new indicator for each major index compares to our current market trend model. The comparison assumes that we go long when the indicators says the trend is up and sell when the indicators say the trand is down.

5 Year Profit Comparison: New Model Versus Current Trend Model
	New Model	Current Trend Model	Improvement
IXIC	$1,210	$1,112	8.8%
SPX	$464	$297	56.3%
DJI	$5,789	$3,189	81.5%

We will keep our current trend model in place until the new one is completed.

Market Summary

Overview of market direction and industry rotation

Index

Value

Change Week

Change YTD

Trend

Dow

12512

-0.67%

8.07%

NASDAQ

2803.32

-0.89%

5.67%

S&P 500

1333.27

-0.34%

6.01%

Russell 2000

829.06

-0.79%

5.79%

Wilshire 5000

14086.4

-0.37%

5.99%

1 Week	13 Weeks	26 Weeks	Year-to-Date
Best Performing Index
S&P 500 -0.34 %	Dow Jones -0.69 %	Russell 2000 14.45 %	Dow Jones 8.07 %
Best Performing Industry (by average technical score over each period)
1 Week	3 Weeks	13 Weeks	26 Weeks
Cigarettes	Drugs Wholesale	Long-Term Care Facilities	Silver
Most Improved Industry (by change in technical rank²)
Tobacco Products - Other + 58	Tobacco Products - Other + 126	Aerospace/Defense - Major Diversified + 171	Hospitals + 150
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. 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	7	12.77	7.71%	5.08%
Last Week	11	13.62	8.91%	3.12%
13 Weeks	206	14	12.41%	0.84%

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