RE: Lagging RSLines (was: [CANSLIM] SHFL Breaking Out)

From: "Katherine Malm" <kmalm@earthlink.net>
Subject: RE: Lagging RSLines (was: [CANSLIM] SHFL Breaking Out)
Date: Tue, 27 May 2003 20:22:04 -0500
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Hi jans,

Your comment about the leaders showing lagging RSLines peaked my interest.
So, here's my personal impressions along with some statistics to back them
up...

I think the bottom line is that when you have a group of early leaders that
break out early in a rally, the leaders' RSLines will likely pull back for a
couple of reasons. First, it's not uncommon for a strong stock to pause
along its rising price path. When this pause occurs while the rest of the
market is not particularly strong, the RSLines of these leaders will
continue to rise because their sideways price action will still be
outperforming a market where prices as a whole are not rising particularly
quickly (or at all). However, if the stock is pausing while additional
monies are flowing into the market in general and market prices are rising,
this pause in the leaders' price action will translate into a pullback in
the RSLine. Second, if instead, the leaders do indeed continue to rise, but
at a time when the market as a whole is strong and getting stronger, then
the RSLines will fall back, because the rise is relative to a market where
prices are increasing at a fast clip. In other words, the positive
divergence between the price action of the leaders and the rest of the
market begins to dissipate as the market gets stronger.

To illustrate this in action, I took all the cup with handle (cwh) breakouts
for the month prior to and after the follow thru day on 3/17/03. While this
doesn't represent *all* breakouts during the period, it's a very good
barometer, because the cwh pattern is by far the most common intermediate
term pattern. I chose the 2 months around the FTD so that I could  have a
steady state group of "leaders" and then measure their technical condition
against the market as a whole between the beginning of that period and
5/23/03 (which is when I prepared the stats). For the period between 2/17/03
and 4/17/03, there were 71 distinct stocks that broke out. I used the same
methodology we use for measuring the industry scores for use in assigining
industry rank and then measured that group score from 2/17 through 5/23. The
score is derived by assigning points to each stock based on the RSRank, %
off 52 week high, price relative to the 50dMA, price relative to the 200dMA,
an 50 realtive to 200dMA. (For a more in depth description, see
http://www.breakoutwatch.com/industry_methodology.htm )

Here is a graph of the score for this group of leaders against the market as
a whole:
http://www.cwhcharts.com/katherine/cwhBreakoutsGroupA.jpg

Notice that wile the group as a whole has pulled back in score ever so
slightly, it is still at a very high value of 90 out of a possible 100.
Notice also that the market as whole has been very strong during this
period, rising very steadily. What that translates into is a pause in the
action of the leaders that is very mild against a strengthening market. That
would mean that the RSLines would then fall back a bit.

Here's another view point to demonstrate the strength of the market during
that same period:

First is the total number of cwh breakouts by week:
http://www.cwhcharts.com/katherine/cwhBreakoutsByWk.jpg
Notice the dearth of breakouts in mid-2002 and the more recent increase.

You can also see the increase in the total number of cwh breakouts by
looking at the cumulative number since the 10/10/2 market low:
http://www.cwhcharts.com/katherine/cwhBreakoutsCumul.jpg
We're now up to more than 300 cumulative breakouts and the rate of breakouts
per week has accelerated since mid March when we posted the FTD.

Here's another viewpoint to show the cwh breakouts action. This is a rolling
total. At any point in time, the number you see shows the total number of
breakouts over the prior 13 week period:
http://www.cwhcharts.com/katherine/cwhBreakoutsRolling13wks.jpg
Notice how the cumulative total rose into late 2002, then churned a bit
until about 2/21/3. That's about 1 month prior to the FTD 3/17/3 and
corresponds to the beginning of the period I selected for highlighting the
"leaders" in the rally.

Now, one last view to show the strength of the breakouts and the market as a
whole during the latest 13 week period. I've taken three 13 week periods and
measured the action of the cwh breakouts during each of those periods. The
chart shows the price action of the breakouts 3 weeks after they originally
broke out. I used 3 weeks, because WON often suggests that we look to see
not only *how many* stocks are setting up and breaking out, but also *how
strong* those breakouts are in the first few weeks of their breakout:
http://www.cwhcharts.com/katherine/PctIncAfterBO.JPG

Notice that for the period 11/25/02 through 2/21/03 that only 1.3% of
breakouts were up >=20% and only about 16% were up 5% or more in the first 3
weeks. The number of failures (down more than 8% in the first 3 weeks) was
also very high, 25% of all the breakouts. However, in the latest 13 week
period (2/24/03 through 5/23/03), 12.7% of the breakouts during the period
are up >=20%, and 47% are up >=5%. At the same time, failures are down
considerably at 7.8% of the total breakouts during the period. Looking at
the performance to date of all breakouts during the latest 13 week period,
57.2% are now up >=5% since their breakout and only 6% have failed.

Bottom line.... the leaders are still strong (average technical score for
the group 90 out of 100) + market continues to serve up more breakouts +
market continues to serve up successful breakouts and shows a small % of
failed breakouts = RSLines of the leaders will fall back a bit.

That said, this is a record of the market as it is today. If the number of
breakouts begins to wane, if the price action of breakouts falls back, if
breakouts begin to fail, and/or if the price/volume action in the indexes
begins to show churning and/or distribution, then those would be signs the
rally is over. By itself, a slight pullback in the RSLines of the leaders
does not, by itself indicate problems.

Katherine


- -----Original Message-----
From: owner-canslim@lists.xmission.com
[mailto:owner-canslim@lists.xmission.com]On Behalf Of Spencer48@aol.com
Sent: Thursday, May 22, 2003 3:53 PM
To: canslim@lists.xmission.com
Subject: Re: [CANSLIM] SHFL Breaking Out


Charley:

     I don't know if its my gut (or just indigestion due to my uncertainty),
but a lot of leaders seem to me to have lagging or weak Relative Strength
Lines.  To me, when the leaders portray this, it indicates that not too many
funds
are interested in buying (ie. they expect a correction shortly).

     This is just an impression I have from looking look at a lot of charts
everyday; it is not based on any rigorous statistical analysis (alà what
Katherine might do-to all our benefits, I should accurately add).

jans


In a message dated 5/22/2003 4:53:45 PM Eastern Daylight Time,
Chazmoore@aol.com writes:

<< SHFL closed at $25.00 on volume that was up over 423%, clearly indicating
 strong buying pressure, but not enough to push the price much over the
pivot.
 Tomorrow could be interesting. My gut tells me there may be more sellers
lurking
 around waiting to get out. Notice that the handle volume did not really dry
up
 that much.

 Charley >>

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