Notes From The Editor

In 1993 Dr. Alex Elder wrote a popular book that became the "official" trader's manual ... "Trading For A Living." Since then he's written several more books for traders, including one aptly titled "Sell & Sell Short." Below I've included brief excerpts from chapters three and seven. When you read them you'll get a valuable glimpse into a veteran trader's mind.

Enjoy!

Sell & Sell Short

"On Keeping Records" - from Chapter Three

Whenever you put on a trade, you must have two goals. The first, of course, is to make money. The second is to become a better trader.

You can reach the first goal in some trades, but not in every trade. There is a fair bit of randomness in the markets, and even the best planned trades can go awry. Even a top trader cannot win in every trade -- this is a fact of life.

On the other hand, becoming a better trader is an essential and very reachable goal for every trade. Whether you win or lose, you must become a better trader at the conclusion of each trade. If you haven't, the trade has been wasted. All the energy and time you put into analysis, all the risks you took with your money -- wasted. You must keep learning from your experience, otherwise you are just playing at being a trader and not being serious. The absence of records exposes a wannabe trader as a dreamer and an imposter.

The best way to learn from your experience is to keep good records. Keeping good records allow you to transform fleeting experiences into solid memories. Your market analysis and your decisions to buy or sell become deposits in your data bank. You can draw on those memories, re- examine them, and use them to grow into a better trader. Writing your notes makes you focus and use your "extracranial memory." A human mind has a limited amount of memory that is instantly available (what the computer people call RAM).

The rules of money management we have just discussed will help you survive the inevitable rocky times. The record-keeping methods I am about to share with you will put your learning into a solid uptrend, and your performance will follow. Money management and record-keeping, taken together, create a rock-solid foundation for your survival and success.

"Shorting Stocks" - from Chapter Seven

Stocks do not move in straight lines. They rise and fall as naturally as humans inhale and exhale. Some of their rises and declines are minuscule, but others are quite large, presenting attractive trading opportunities.

There is one common prejudice from which you must free yourself in order to sell short. Most people feel comfortable buying but feel uneasy profiting from declines. I think they acquire this prejudice as young adults. When I taught a class on trading at a local high school, the kids took to shorting like fish to water. They were responsible for bringing in trading ideas, and we would discuss them in class and trade them in the account I had opened for that class. On any given day the kids would make as many suggestions to sell short as to buy. Often the same kid would bring up both a long and a short.

The kids got it. They understood that trading means betting on moving objects. It matters little whether you bet on a rise or a decline. You only need to get the direction right and determine the most promising entry point, profit target, and where to place a protective stop. The kids came to the market without prejudices and had no inhibitions against shorting. The class bagged some profits on the way up and on the way down. It also took some losses in both directions, but we made sure they were smaller than our wins. We played the game in both directions.

Thanks Alex!

Enjoy the weekend,

- Thomas Sutton, Editor

Quick List

    
Stock     08/19     08/19      Buy      Short   Trailing Stops     Gain 
Symbol    Price      +/-      Entry     Entry   Initial/Tighten   Amount 
------  --------  --------  --------  --------  ---------------  --------

SD        20.51     -0.46     21.38     19.81        1.57/0.79      2.48
CRNX      21.34      0.13     21.77                  1.58/0.79      2.78
RNA       20.94     -0.47     21.59     19.88        1.71/0.86      2.24
GDYN      20.47     -0.01     20.91                  1.84/0.92      1.86
CRNC      20.50     -0.91     21.14     19.62        1.52/0.76      2.34

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 more on controlling risk go to the RightLine Risk Control System

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

Questions? Send us an email using our Contact Form.

Market Summary

US stocks were lower on Friday as the markets contemplate the minutes released earlier this week from the July Federal Reserve Bank FOMC meeting indicating rate hikes may continue in the short term. The economic calendar didn't have any major reports, but releases will resume next week. In equities, Deere & Co. (DE $370) fell short of quarterly earnings estimates, while Foot Locker (FL $38) handily beat profit projections and announced a new CEO. Oil prices and the USD/dollar moved higher, treasuries and gold prices were lower.

                      Friday                 On The Week      
                  --------------------   --------------------
Dow                 33,706.74  -292.30       -54.31    -0.16%
Nasdaq              12,705.22  -260.13      -341.97    -2.62%
S&P 500              4,228.48   -55.26       -51.67    -1.21%

NYSE Volume                      3.79B                       
NYSE Advancers                     467                       
NYSE Decliners                   2,714                       

Nasdaq Volume                    4.62B                       
Nasdaq Advancers                   987                       
Nasdaq Decliners                 3,541                       

                                 New Highs/Lows

                   08/12  08/15  08/16  08/17  08/18  08/19
                 --------------------------------------------
NYSE New Highs        56     61     64     35     55     26
NYSE New Lows         24     19     21     34     30     57
Nasdaq New Highs      96     90     91     50     79     46
Nasdaq New Lows       61     52     61     76     73    109
   

TRADER'S TIP: "Holding Their Ground"

Buying stocks isn't the first thing that comes to mind on days when the market is slammed with a big sell-off. However, these sessions can be very helpful for bullish traders. Stocks that show relative strength for the day - either posting a gain or only suffering a small decline - are often strong performers after the market stabilizes. This is especially true of equities that hold firm without any specific news story keeping them afloat; the relative strength reveals underlying technical strength and a solid commitment by investors.

The Technical Analyst

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

S&P 500 - 4228.48 August 19, 2022

52-Week High: 4818.62
52-Week Low: 3636.85
Daily Trend: DOWN
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 4470.64
Resistance 2: 4364.06
Resistance 1: 4296.27
Pivot: 4257.48
Support 1: 4189.69
Support 2: 4150.90
Support 3: 4044.32

NASDAQ Composite - 12705.22 August 19, 2022

52-Week High: 16212.23
52-Week Low: 10565.14
Daily Trend: DOWN
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 13866.16
Resistance 2: 13359.94
Resistance 1: 13032.58
Pivot: 12853.72
Support 1: 12526.36
Support 2: 12347.50
Support 3: 11841.28
        
Dow Industrials - 33706.74 August 19, 2022

52-Week High: 36952.65
52-Week Low: 29653.27
Daily Trend: UP
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 35253.82
Resistance 2: 34555.42
Resistance 1: 34131.07
Pivot: 33857.01
Support 1: 33432.67
Support 2: 33158.61
Support 3: 32460.21
 

Market Calendar

ECONOMIC REPORTS AND EVENTS (all times are Eastern):    

Monday, August 22, 2022:
22-Aug  8:30 am   Chicago Fed national activity index

Tuesday, August 23, 2022:
23-Aug  9:45 am   
23-Aug  9:45 am   
23-Aug  10 am   New home sales (SAAR)

Wednesday, August 24, 2022:
24-Aug  8:30 am   Durable goods orders
24-Aug  8:30 am   Core capital equipment orders
24-Aug  10 am   Pending home sales index

Thursday, August 25, 2022:
25-Aug  8:30 am   Initial jobless claims
25-Aug  8:30 am   Continuing jobless claims
25-Aug  8:30 am   Real gross domestic product. revision (SAAR)
25-Aug  8:30 am   Real gross domestic income (SAAR)
25-Aug  8:30 am   Real final sales to domestic purchasers, revision (SAAR)

Friday, August 26, 2022:
26-Aug  8:30 am   PCE price index monthly
26-Aug  8:30 am   Core PCE price index monthly
26-Aug  8:30 am   PCE price index year-over-year
26-Aug  8:30 am   Core PCE price index year-over-year
26-Aug  8:30 am   Real disposable incomes
26-Aug  8:30 am   Real consumer spending
26-Aug  8:30 am   Nominal personal incomes
26-Aug  8:30 am   Nominal consumer spending
26-Aug  8:30 am   Trade in goods, advance
26-Aug  10 am   UMich consumer sentiment index (final)
26-Aug  10 am   UMich 5-year inflation expectations (final)


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

TRADER'S TIP: "Tax Deduction Reminder"

Your subscription to the RightLine Report may be tax deductible as an investment expense under IRS Sections 67 and 212, to the extent that miscellaneous itemized deductions exceed 2% of your adjusted gross income. It is also fully tax deductible as a business expense by most corporations under Section 162 of the IRS Code.

Stocks Covered in This Issue

ENERGY SECTOR

SandRidge Energy, Inc. (SD: Energy/Oil & Gas E&P) - SQUEEZE PLAY. One interesting trait of price volatility is that it cycles back and forth through periods of expansion and contraction. Stocks that have recently seen their daily price range shift from an average or wide range to an extremely contracted state are ideal candidates for expansive price moves. In many cases the next move is relatively fast and covers a sizable amount of territory. To take advantage of these trades we use both a BUY and a SELL entry. This allows us to enter in whichever direction the breakout takes. In SD's case we will enter a BUY should it reach the 21.38 level, or a SELL short trade if it drops to 19.81. As usual a trailing stop is essential, 1.57 which should be tightened to 0.79 on a 2.48 gain. SD closed Friday at 20.51. Earnings Report Date: Nov 07, 2022. Beta: 2.45. Market-Cap: 753.574M. Optionable.

HEALTHCARE SECTOR

Crinetics Pharmaceuticals, Inc. (CRNX: Healthcare/Biotechnology) - BULLISH BOUNCE. Here is another example of a stock in an established uptrend that has recently experienced a counter-trend drop. The sliding price action has now found support near a moving average zone, bouncing upward during Friday's session to close at 21.34. Anticipate the rebound to continue, and be ready to buy CRNX at 21.77. Follow your entry with a trailing stop of 1.58 which can be tightened to 0.79 on a 2.78 profit. Earnings Report Date: Nov 03, 2022. Beta: 1.21. Market-Cap: 1.147B. Optionable.

Avidity Biosciences, Inc. (RNA: Healthcare/Biotechnology) - SQUEEZE PLAY. Trader indecision has put RNA squarely in the center of a Bull versus Bear standoff. This tight spot should soon give way to a clear winner in the short-term, and we want to be in position for the move. To do that we've set a BUY entry at 21.59 and a SELL short entry at 19.88. Now it's up to RNA to show us which entry will be filled. Once the trade is underway place a 1.71 trailing stop, which can be tightened to 0.86 after you achieve a 2.24 profit. RNA closed on Friday at 20.94. Earnings Report Date: Nov 07, 2022. Beta: 1.10. Market-Cap: 1.092B. Optionable.

TECHNOLOGY SECTOR

Grid Dynamics Holdings, Inc. (GDYN: Technology/Information Technology Services) - BULLISH BOUNCE. Looking a bit frayed after sliding downhill in recent sessions, on Friday GDYN seemed intent on initiating a rebound. With moving average support nearby, GDYN is at a logical place for Bulls to regroup and extend the familiar uptrend that shareholders have become accustomed to. On continued buying, plan on taking long entries with a BUY at 20.91. Manage risk with a 1.84 stop. Tighten your stop to 0.92 when you have a 1.86 profit. GDYN ended the day at 20.47. Earnings Report Date: Nov 02, 2022. Beta: 1.13. Market-Cap: 1.378B. Optionable.

Cerence Inc. (CRNC: Technology/Software-Application) - SQUEEZE PLAY. When a stock's daily price range contracts to an unusually low point, you can safely assume that in most cases a breakout from that range will result in a nice price move. To capture a portion of this potential movement we have set both a long and a short entry into CRNC. A move to the upside will trigger our BUY entry at 21.14, while a drop to 19.62 will trigger our SELL short entry. Follow your position with a 1.52 trailing stop. Tighten the stop to 0.76 once you have a 2.34 gain. CRNC closed Friday at 20.50. Earnings Report Date: N/A. Beta: 2.64. Market-Cap: 807.358M. 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  
---------------- -------     --------    -------     ------  -------   
Gamestop          GME        7/7/2022   7/22/2022    4-for-1   Yes
Alphabet          GOOG       2/1/2022   7/18/2022   20-for-1   Yes
Nasdaq Inc        NDAQ       7/20/2022  8/29/2022    3-for-1   Yes    

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.

Trader's Corner

Overbought/Oversold Overload

Analysts love to show off their expertise by proclaiming that the markets have become overbought or oversold. Unfortunately, few of us seem to understand what these terms really mean or what we should do when these moments of truth arise.

Should we run for the hills because a market is overbought, or perhaps load up the boat because it's oversold? And how do we know when one of our trades might fall prey to one of these extreme conditions?

The best way to understand overbought or oversold markets is to study the nature of supply and demand. At any given moment, a finite pool of buyers and sellers is available to take action on a particular stock. The trading activity of this crowd usually stays within fairly narrow boundaries.

But imbalances develop over time and force one side to pull the trigger, sometimes prematurely. This "uses up" that side of the market and awakens price mechanics that favor the other side.

Bollinger Bands offer an effective tool for measuring overbought/oversold conditions. Notice how Nvidia (NVDA) triggers a short-term reversal each time price bars thrust outside the extremes of the 20-day Bollinger Bands. These outer bands tell swing traders to expect a reversal before real evidence appears on the price chart. This allows them to take high-profit exits while the rest of the crowd is caught in the moment.



It's important to note that overbought/oversold markets are relative to a trader's time frame. In the NVDA chart, some reversals were simple pullbacks in the underlying trend, while others represented major market turns. It is vitally important for traders to define their holding period before reacting to short-term price swings. Major profits will be lost by planning the trade in one time frame but executing it in another.

Stochastics represents the classic overbought/oversold oscillator. Unfortunately, most traders don't understand how to interpret the information it provides. The worst thing you can do is jump ship just because stochastics hits a high or low extreme. Most swing-trading profits are booked in the early stages of overbought or oversold markets. Of course, that's where most of the risk is as well.



Use simple double-top or double-bottom patterns to pinpoint reversals driven by overbought or oversold conditions. The best signals come when stochastics makes a lower high (or higher low) and expands in the opposite direction. This type of pattern will often complete ahead of price change, and should be acted upon without waiting for further confirmation.

A single price bar can change everything. Stocks trade with an average high-low range through most market conditions. When this range expands sharply after an extended trend, it issues a loud overbought-oversold signal.



What exactly does this mean? First off, when a price bar expands in a new breakout, it's the beginning of something and not a reversal signal. But when a stock ramps from one price level to another, and then pops an expansion bar, get ready to close up shop in a hurry.

Traders must deal with the relativity of overbought/oversold markets. A longer-term Wilder's relative strength index (RSI) really drives home this vital point. It captures broad cycles of market movement, and it can stay at overbought or oversold levels for extended time periods.



As with the stochastics indicator, hold your ground until RSI shows definite signs of moving in the other direction. This usually comes when it drops below (lifts above) the extension line. Even then, compare RSI with the price pattern to determine whether a major turn, or simple pullback, is under way.

***********************************

This special guest article was written by Alan Farley, author of "The Master Swing Trader."

A simple yet powerful tool, the Risk Control Calculator helps you manage risk by recommending a maximum number of shares to purchase. Available in the RightLine Member's Area.

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