Notes From The Editor

Risk management is the rock-solid foundation of any successful trading strategy. Sure, you can survive for awhile without it - but eventually your luck will run out, and your account will suffer the consequences. Embrace risk management, and you can set yourself up for the sort of ongoing trading success that eludes those with a more haphazard approach.

Part of this involves position sizing - or to put it plainly, not putting too much money on any single position. But that's only part of the game. The other pillar of risk management involves being very selective about the trades you take. The rule is simple: if the stock doesn't offer an acceptable risk/reward ratio, you move on to greener pastures.

The risk you assume on any trade correlates directly to your stop placement. For example, if you start a trade with a trailing stop of 3.00, this is your maximum risk. (The rare exception is an overnight gap past your stop - but again, position sizing should limit your losses when this occurs). A general rule of thumb for swing trading is to use at least double the stock's average true range (ATR); the ATR is the amount it typically moves in one session.

Reward depends on a stock's potential to rise or fall (for bullish and bearish trades, respectively). This isn't as cut-and-dry as determining potential risk. However, technical analysis can be a helpful and reliable guide. Look first for the nearest support or resistance levels. These are important lines in the sand, where buyers and sellers will meet to duke it out. Also look for moving averages and trendlines, which can also lead to price reversals.

So what constitutes a good risk/reward? Except for rare circumstances, such as playing a news event, you never want to take a trade that has a risk/reward ratio worse than 1:2. Ideally, look for a ratio of 1:2.5 or 1:3. In some cases, when a stock faces a large fast-move zone (an area where there's no support/resistance), the risk/reward ratio can be even larger! These make for great set-ups, and you'll find them often here in the RightLine Report.

Let's illustrate all of this with a few hypothetical examples. Imagine ticker XYZ is poised to clear strong resistance at 30.00. A breakout above that level could offer a great set-up - but only if it passes the risk/reward test. Based on its ATR of 80 cents, you know that your stop should be roughly 1.60. Then, you look at the daily chart to see how far the stock might run over the short-term. It turns out it's smooth sailing up until 34.75, which translates to about 4.75 of potential reward. This would equate to a risk/reward of roughly 1:3. Knowing this, you feel comfortable pulling the trigger and jumping onboard.

Now let's use the same stock, but with higher volatility. In this example XYZ has an ATR of 2.00, rather than 80 cents. Doubling that amount would mean that your initial stop would be 4.00. Risking 4.00 to potentially make 4.75? That doesn't sound like a winning proposition - and its risk/reward is much worse than 1:2 - so you move on to other trades.

The "art" behind calculating risk/reward comes into play when potential support/resistance levels are loosely-defined. This is when your own judgment comes into play. Will price action will reverse from that level, or will it continue on to another area of congestion? Let your own experience and traders' instinct help you answer that question.

Finally, if you can't get a firm handle on a set-up's risk/reward, don't hesitate to move on. In a market teeming with stocks, a bit of extra digging should turn up a candidate where your risk/reward is clearly defined and in your favor. Remember - the market will keep throwing pitches. It's you, the empowered and educated trader, that decides when to swing!

Here's to profits,

Kent Barton
Senior Analyst

Quick List

    
Stock     04/28     04/28      Buy      Short   Trailing Stops     Gain 
Symbol    Price      +/-      Entry     Entry   Initial/Tighten   Amount 
------  --------  --------  --------  --------  ---------------  --------

DDS       31.15      2.86               27.72        4.54/2.27      9.10
DK        20.41      0.99     21.03     19.07        1.96/0.98      4.12
TOWN      20.41      0.63     20.95     19.51        1.44/0.72      2.20
AKR       11.90      0.58               11.10        1.37/0.69      2.64

The "Quick List" provides a brief summary of each stock write-up and should be taken in the context of the related write-up presented in the "Stocks Covered in This Issue" section of this Report.

Be sure to read "How To Use The RightLine Quick List" and always use the RightLine Risk Control Calculator before entering any position. For access to the Risk Calculator, go to http://www.rightline.net and login to the Member's area.

For more on controlling risk go to the RightLine Risk Control System

For a glossary of terms unique to The RightLine Report go to: Glossary

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Market Summary

Stocks closed lower on Tuesday as earnings season continues to produce mixed results and a tendency for companies to withold guidance. This, plus the consistent weak economic news since the US economy was shut down due to coronavirus, is causing normally bullish traders to be more cautious than normal. Consumer Confidence dropped to 2014 lows and regional manufacturing output in the south contracted hard. In equities, Caterpillar (CAT $115) reported a 33% drop in quarterly earnings compared to a year ago, while revenues fell 21%. CAT withdrew its guidance for the year. Shares finished slightly higher. Gold, the USD/dollar, treasury yields and oil prices all declined.

                        Apr 27, 2020           Apr 28, 2020   
                  --------------------   --------------------
Dow                    24,134  +358.51        24,102   -32.23
Nasdaq               8,730.16   +95.65      8,607.73  -122.43
S&P 500                 2,878   +41.74         2,863   -15.09

NYSE Volume                      5.31B                  5.70B
NYSE Advancers                    2329                   2139
NYSE Decliners                     644                    822

Nasdaq Volume                    3.73B                  3.71B
Nasdaq Advancers                  2556                   1870
Nasdaq Decliners                   695                   1372

                                 New Highs/Lows

                   04/21  04/22  04/23  04/24  04/27  04/28
                 --------------------------------------------
NYSE New Highs         8     16     21     14     31     31
NYSE New Lows         31     22     18     23      9      4
Nasdaq New Highs      24     30     38     39     67     54
Nasdaq New Lows       41     16     24     23     12      8
   

TRADER'S TIP: "More on Trading Frequency"

"If we flip a coin only ten times our odds of having 50% heads and 50% tails are not very good. However if we flip the coin one thousand times we are likely to come much closer to obtaining 50% heads and 50% tails. The same logic applies to our real-time trading. If we have a large sample of real trades then our results should come closer to our expectations than if we only have one or two trades. The active system will approach our expectations much quicker than the system that trades infrequently. If we have 50 or more trades per month with a good system we might reasonably expect to be profitable every month. However if we have a system that is only producing two or three trades per month then our monthly results will less predictable and inconsistent. The infrequent trading system might be expected to produce a profit every year but it would not be realistic to expect it to show a profit every month because the sample size in a month will be very mall."

~Chuck LeBeau, Trader and author

The Technical Analyst

For help with this chart, be sure to read "Understanding The Importance Of Support And Resistance"
and "Boost Your Profits With Moving Averages".

S&P 500 - 2863.39 April 28, 2020

52-Week High: 3393.52
52-Week Low: 2191.86
Daily Trend: UP
Weekly trend: DOWN
Weekly Pivot Levels
Resistance 3: 3094.70
Resistance 2: 2952.82
Resistance 1: 2894.78
Pivot: 2810.94
Support 1: 2752.90
Support 2: 2669.06
Support 3: 2527.17


NASDAQ Composite - 8607.73 April 28, 2020

52-Week High: 9838.37
52-Week Low: 6631.42
Daily Trend: UP
Weekly trend: DOWN
Weekly Pivot Levels
Resistance 3: 9450.14
Resistance 2: 8980.92
Resistance 1: 8807.72
Pivot: 8511.70
Support 1: 8338.50
Support 2: 8042.48
Support 3: 7573.26
        
Dow Industrials - 24101.55 April 28, 2020

52-Week High: 29568.57
52-Week Low: 18213.65
Daily Trend: UP
Weekly trend: DOWN
Weekly Pivot Levels
Resistance 3: 25942.23
Resistance 2: 24775.42
Resistance 1: 24275.34
Pivot: 23608.61
Support 1: 23108.53
Support 2: 22441.80
Support 3: 21274.99
 

Market Calendar

ECONOMIC REPORTS AND EVENTS (all times are Eastern):    

Monday, April 27, 2020:
27-Apr          None scheduled

Tuesday, April 28, 2020:
28-Apr  8:30 am   Advance trade in goods
28-Apr  9:00 am   Case-Shiller home price index
28-Apr  10:00 am   Consumer confidence index
28-Apr  10:00 am   Homeownership rate

Wednesday, April 29, 2020:
29-Apr  8:30 am   Gross domestic product
29-Apr  10:00 am   Pending home sales index
29-Apr  2:00 pm   FOMC announcement
29-Apr  2:30 pm   Jerome Powell press conference

Thursday, April 30, 2020:
30-Apr  8:30 am   Initial jobless claims
30-Apr  8:30 am   Employment cost index
30-Apr  8:30 am   Personal income
30-Apr  8:30 am   Consumer spending
30-Apr  8:30 am   Core inflation
30-Apr  9:45 am   Chicago PMI

Friday, May 1, 2020:
01-May  9:45 am   Markit manufacturing PMI
01-May  10:00 am   ISM manufacturing index
01-May  10:00 am   Construction spending
01-May  Varies   Motor vehicle sales (annual rate)



For a chart of typical Up or Down market reactions to specific major US economic reports 
go to:  Economic Indicator Effects

TRADER'S TIP: "Weekly Volume"

Trading volume either confirms price movement or brings it into question. It's considered very bullish when a stock rises on higher than average volume, while a similar move on lower than average volume is less bullish. It's always a good idea to look at a weekly chart to confirm rising volume. You can have five sessions of moderately higher volume on a daily chart without seeing anything significant. But put it on a weekly chart and suddenly it stands out in stark contrast. When all of those slightly higher volume days are added together, they show a real spike. Rising volume often means that institutions are buying, and that's the kind of buying that drives stocks skyward.

Stocks Covered in This Issue

CONSUMER CYCLICAL SECTOR

Dillard's, Inc. (DDS: Consumer Cyclical/Department Stores) - NEW LOW RISE. Another troubled bottom dweller, DDS just recently set a new 12-month low. Having bounced since then, DDS's bearish response to an encounter with moving average support on Tuesday shows that the stock may be ready for another move lower. Now at 31.15, an downward push to 27.72 will signal a SELL short entry. Once in the trade, place a 4.54 trailing stop which can be tightened to 2.27 after you've gained 9.10. Earnings Report Date: May 13, 2020. Beta: 1.34. Market-Cap: 722.618M. Optionable.

ENERGY SECTOR

Delek US Holdings, Inc. (DK: Energy/Oil & Gas Refining & Marketing) - SQUEEZE PLAY. Tuesday's narrow price range has created a potentially profitable setup in DK, as sellers and buyers find themselves in a near tie for control of price direction. The next short-term trend could go either way, so prepare for a move out of the draw within the next day or so. Set a BUY entry at 21.03 and a SELL short entry at 19.07. Let DK's price action determine your long or short entry. Once the order is filled, place a 1.96 trailing stop, and tighten it to 0.98 upon getting a 4.12 gain. DK closed Tuesday at 20.41. Earnings Report Date: May 05, 2020. Beta: 1.81. Market-Cap: 1.5B. Optionable.

FINANCIAL SERVICES SECTOR

TowneBank (TOWN: Financial Services/Banks-Regional) - SQUEEZE PLAY. A look at TOWN's daily chart shows what a price squeeze is all about. The constricted high-low daily trading range has produced a setup similar to a tightly coiled spring. Expect price to move sharply soon, with the direction yet to be determined. Let the upcoming market action resolve whether you will buy shares or sell short. To capture a move either way, place a BUY trigger at 20.95 and a SELL short trigger at 19.51. Once TOWN shows which way it's headed, place your triggered entry order. As soon as your order is filled, follow with a trailing stop of 1.44 and tighten to 0.72 on a 2.20 gain. TOWN closed Tuesday at 20.41. Earnings Report Date: Jul 23, 2020. Beta: 1.26. Market-Cap: 1.482B. Optionable.

REAL ESTATE SECTOR

Acadia Realty Trust (AKR: Real Estate/REIT-Retail) - NEW LOW RISE. New lows always indicate a stock is doing exceptionally bad. This is the case with AKR, which has moved up a bit after setting a new 52-week low just a few days ago. Tuesday's reaction to Moving Average resistance tells us this stock may be ready to move back down to new low territory once again. AKR now sits at 11.90, and we're anticipating a move down to our SELL trigger at 11.10. Be ready to sell shares short at that point and follow your entry with a 1.37 trailing stop. Tighten the stop to 0.69 on a 2.64 gain. Earnings Report Date: May 05, 2020. Beta: 1.30. Market-Cap: 1.033B. Optionable.

IMPORTANT: Before entering any positions, always use the Risk Control System to determine the level of acceptable risk and the maximum number of shares to buy. Use Gap Adjusted Entries to reset the Entry Price for stocks that gap beyond recommended entry levels.

Stock Splits

Below are the stocks that have announced splits and have recently executed or will execute soon. There is generally a return to normal price behavior in the weeks following a split announcement in what we call a "Dormancy Phase." As the stock nears its split execution date (Effective Date) it often moves into the "Pre-Split Run" stage where quick and sometimes dramatic gains can occur.

                             Announce     Eff.       Split
Company Name     (Symbol)      Date       Date       Ratio   Options  
---------------- -------     --------    -------     ------  -------   

Currently there are no upcoming stock splits on the major US exchanges.
    

Split details are also available online at the RightLine Online Stock Split Calendar. For a detailed look at the different stages of a Stock Split, Click Here.

A simple yet powerful tool, the Risk Control Calculator helps you manage risk by recommending a maximum number of shares to purchase. Available to all RightLine subscribers. For access, go to http://www.rightline.net and login to the Member's area.

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