Although our trend indicator for the NASDAQ turned positive on Tuesday, two distribution days and a fall below the 50 day average on Friday are likely harbingers of another reversal to come. If the index holds above the 2950 support level then we may see a trading range between 3050 and 2950 develop.



Sunday is the anniversary of the flash crash and there was an insightful article over at The Big Picture:

" More than $250 billion in long term equity funds has retreated from the markets since May 6th, 2010 – despite a slow but steady improvement in the economy and a stock market that has nearly doubled since the 2009 lows. It isn’t that these investors don’t have confidence in the economy. They don’t have confidence in our markets.

It isn’t hard to blame them. They have witnessed a radical transformation of the best capital allocation market system in the world....."  Read More

No new features this week.

Two weeks ago we looked at the question of whether stocks that breakout and then pull back to within 1% of their breakout price within two weeks of initial breakout offered investment potential as compared to normal breakouts. We looked at how they performed within 4 weeks of their pullback and concluded that these stocks did indeed have potential,  see (Performance of Breakouts that pull back to Support)

As we pointed out at the time, the analysis was inconclusive as there was no defined entry point for the trade (if you bought on pullback to with 1% of BoP, there was no way of knowing that the stock would not fall further).

We have now defined a hypothetical entry point and can continue our analysis.

We reason that before pulling back, the stock must have set a new resistance level above the original breakout price, so we will only open a trade if that resistance level is reached again. From this insight, we can develop a new set of position entry rules as follows:

1. The stock must pull back to within +/- 1% of the original BoP within two weeks of breakout. Stocks that fall below -1% of the BoP are not considered.
   
2. If the high after initial breakout was more than 5% above BoP then do not consider.
3. The high after breakout and before pullback represents a new resistance level. We only enter a trade if the intraday price rises to at least that level ) BoP2.

Effectively, these rules define a second handle following the initial one. This is how our new pattern looks:

We found all cup-with-handle stocks that met these conditions since April, 2009 and analysed their performance after 1,2,3 and 4 weeks assuming we bought at the new breakout price. Here are the results presented as a histogram in 5% profit margin increments.