Notes From The Editor

Getting Started: Trading the Indexes (Part II)

It's not uncommon to think of the major stock indexes - the S&P 500, Dow Jones, and Nasdaq - as their own entities, not baskets of component stocks. Global events with related spikes in volatility draw even more attention to these gauges of broader market performance. Last week we touched on how their respective tracking stocks (SPY, DIA, and QQQ) could be used to gain exposure to the movement of the indices.

Imagine, for instance, that you believe a recent market correction has run its course. Jumping into long positions in a particular stock (or stocks) would be one way to profit from the anticipated recovery.

Alternatively, you could simply go long the S&P 500 Spiders (SPY), placing a stop slightly under the stock's relative low. The risk/reward for this set-up would be favorable, and with instant diversification you'd be protected against weakness in any specific sector.

Tracking stocks are also utilized by many traders as part of their hedging strategies. Imagine, for example, that you've taken a sizeable bullish position in a trade you intend to hold for several months. While the use of stops helps to minimize your potential losses, a small counter-position (short) in the Spiders (SPY) could be an effective hedge against a broader-market decline.

SPY, DIA, and QQQ are Optionable. Veteran traders, who are familiar with the added risk that comes with playing options, often use these as part of a more advanced hedging strategy or in order to gain leverage in their positions.

One potential downside to playing the Diamonds, Spiders, and Q's is that long periods of time may elapse before a good set-up presents itself. For those who aren't as active in the market, this isn't a problem at all; they swing at the good pitches, and stay in the dugout when the indices aren't cooperating.

Sector-specific HOLDRS are an excellent option for more active traders. Following the same principles as the index tracking stocks, these represent a basket of major equities within a certain group. Rather than having to find the best stock to buy in a group, this simply gives you exposure to the sector's overall performance. And much like the indices, they follow the same technical patterns that guide the price action of individual stocks. Among the most widely-traded are the internets (HHH), semiconductors (SMH), and retailers (RTH).

Have a safe and enjoyable weekend!

Kent Barton
Senior Analyst

Quick List

    
Stock     12/15     12/15      Buy      Short   Trailing Stops     Gain 
Symbol    Price      +/-      Entry     Entry   Initial/Tighten   Amount 
------  --------  --------  --------  --------  ---------------  --------

FG        44.24     -1.71     46.72                  3.97/1.99       3.1
RILY      20.45      0.01     21.54     19.01        2.53/1.27      5.12
IRON      58.72      0.47     59.91                  4.85/2.43      4.86
ANTX      20.70      0.27     21.26     19.42        1.84/0.92      2.86
CHKP     146.02      1.22    148.45                  7.85/3.93      4.52

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

American equities showed minimal changes on Friday, concluding a week marked by solid gains and extending the S&P 500's winning streak to seven weeks. Notably, small-cap stocks stood out, surging more than 5% for the week and approximately 11% in December. This leadership is being fueled by an increasingly optimistic economic outlook, with markets anticipating less restrictive Federal Reserve policies. Friday's sector performance mirrored a balanced sentiment, with varied leadership between cyclical and defensive industries. While interest rates remained stable on the day, there was a decline throughout the week, pushing the 10-year yield as low as 3.9%, its lowest since July.

Recent manufacturing reports present a mixed picture of the economy. Market enthusiasm centers around the idea of a soft landing, although the path forward may involve some fluctuations. November's industrial production, while falling short of consensus estimates, marked an improvement from the previous month. Manufacturing output increased, indicating growth for the fourth time in the last five months after declines during the summer.

This aligns with the concept of a "rolling recession," where different sectors of the economy contract and recover at desynchronized intervals. Despite some slowdown in manufacturing and capital investment over the past year, signs of improvement in these areas are encouraging, potentially offsetting a moderation in consumer spending growth in the first half of 2024 and leading to a more gradual overall GDP moderation.

Consumer behavior holds significant weight in the economic narrative for 2024. Upcoming holiday spending will serve as a crucial indicator of consumer health. In this context, the recent quarterly results from Costco, beating earnings estimates and highlighting strong sales, particularly in discretionary categories like televisions and appliances, provide positive signals. The trajectory of the economy in the coming year hinges on household spending. While some deceleration in GDP growth is expected as consumers adjust to slower wage growth, diminished savings, and increased borrowing costs, the robust labor market is anticipated to provide essential support to prevent a significant downturn.

                      Friday                 On The Week      
                  --------------------   --------------------
Dow                 37,305.16    56.81     +1057.29     2.92%
Nasdaq              14,813.92    52.36      +409.95     2.85%
S&P 500              4,719.19    -0.36      +114.82     2.49%

NYSE Volume                      8.52B                       
NYSE Advancers                     908                       
NYSE Decliners                   1,950                       

Nasdaq Volume                    8.58B                       
Nasdaq Advancers                 1,708                       
Nasdaq Decliners                 2,599                       

                                 New Highs/Lows

                   12/08  12/11  12/12  12/13  12/14  12/15
                 --------------------------------------------
NYSE New Highs       101     44    144    261    379    196
NYSE New Lows         19     10     45     26     10     13
Nasdaq New Highs     145      0    218    353    465    251
Nasdaq New Lows      108      1    188    171     83    108
   

TRADER'S TIP: "That Extra Something . . ."

The ability to relax emotionally and mentally when trading is usually associated with bull markets. And while we all love bullish market conditions, it's best to connect our positive emotions about trading to something more reliable than just upward market movement. Knowing that we can engage the stock market profitably in any environment provides that "something."

Belief, confidence, or whatever you want call it, the conviction that comes from experience and preparation is far more powerful than any bull. Why? Because bull markets don't last forever. What they give, the bear usually takes back - both in dollars and peace of mind. However, bears can't take away your money OR your confidence when it is based on sound trading principles and a realistic belief in your ability to be successful. This is true regardless of the current market trend.

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 - 4719.19 December 15, 2023

52-Week High: 4738.57
52-Week Low: 3764.49
Daily Trend: UP
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 4974.07
Resistance 2: 4828.89
Resistance 1: 4774.04
Pivot: 4683.71
Support 1: 4628.86
Support 2: 4538.53
Support 3: 4393.35

NASDAQ Composite - 14813.92 December 15, 2023

52-Week High: 14855.62
52-Week Low: 10207.47
Daily Trend: UP
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 15726.80
Resistance 2: 15195.75
Resistance 1: 15004.83
Pivot: 14664.70
Support 1: 14473.78
Support 2: 14133.65
Support 3: 13602.60
        
Dow Industrials - 37305.16 December 15, 2023

52-Week High: 37347.60
52-Week Low: 31429.82
Daily Trend: UP
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 39194.13
Resistance 2: 38077.72
Resistance 1: 37691.44
Pivot: 36961.31
Support 1: 36575.03
Support 2: 35844.90
Support 3: 34728.49
 

Market Calendar

ECONOMIC REPORTS AND EVENTS (all times are Eastern):    

MONDAY, DEC. 18					
10:00 am	Home builder confidence index	Dec.		

TUESDAY, DEC. 19					
8:30 am	Housing starts	Nov.			
8:30 am	Building permits	Nov.			

WEDNESDAY, DEC. 20					
8:30 am	U.S. current account	Q3			
10:00 am	Existing home sales	Nov.			

THURSDAY, DEC. 21					
8:30 am	Initial jobless claims	Dec. 			
8:30 am	GDP (revision)	Q3			
8:30 am	Philadelphia Fed manufacturing survey	Dec.			
10:00 am	U.S. leading economic indicators	Nov.			

FRIDAY, DEC. 22					
8:30 am	Durable-goods orders	Nov.			
8:30 am	Durable-goods minus transportation	Nov.			
8:30 am	Personal income	Nov.			
8:30 am	Personal spending	Nov.			
8:30 am	PCE index]	Nov.			
8:30 am	Core PCE index	Nov.			
8:30 am	PCE (year-over-year)			
8:30 am	Core PCE (year-over-year)				
10:00 am	New home sales	Nov.			
10:00 am	Consumer sentiment (final)	Dec.
For a chart of typical Up or Down market reactions to specific major US economic reports 
go to:  Economic Indicator Effects

TRADER'S TIP: "90% Winners = Big Losses"

Most people want to be right on every trade or investment. Because of this "need to be right," traders tend to choose trading systems with the highest level of wins vs. losses. Unfortunately, the losses in these systems are often quite large and produce negative results overall.

Stocks Covered in This Issue

FINANCIAL SERVICES SECTOR

F&G Annuities & Life, Inc. (FG: Financial Services/Insurance - Life) - NEW HIGH DIP. The best stocks move steadily higher in a two-steps-forward and one-step-back series of repetitive new highs. FG reached a new 52-week high a few days ago and has since retreated into Friday's encounter with moving average support. A bounce appears to be in the making, so prepare to pick up a few shares should FG move up to our BUY trigger at 46.72. Post a 3.97 trailing stop which should be tightened to 1.99 after gaining 3.1. Earnings Report Date: N/A. Beta: N/A. Market-Cap: 5.552B. Optionable.

B. Riley Financial, Inc. (RILY: Financial Services/Financial Conglomerates) - SQUEEZE PLAY. The struggle between buyers and sellers has resulted in RILY's narrowest trading range of the past seven sessions. With neither group able to take complete control on Friday, the stock's short term destiny is up for grabs. You can capitalize on this unusually tight condition by placing both a BUY order at 21.54 and a SELL order at 19.01. Regardless of which order is triggered, cancel the other one and follow your entry with a 2.53 trailing stop. Tighten the stop to 1.27 once you have a 5.12 gain. RILY closed Friday at 20.45. Earnings Report Date: Feb 20, 2024. Beta: 1.62. Market-Cap: 660.913M. Optionable.

HEALTHCARE SECTOR

Disc Medicine, Inc. (IRON: Healthcare/Biotechnology) - NEW HIGH DIP. The price momentum required to set a new high doesn't usually disappear over night. Traders can capitalize on this fact by entering positions when stocks making new highs pull back to a support level, then follow the pullback with signs of bouncing higher. IRON meets the setup criteria, so get ready to BUY into this outstanding performer at 59.91. Enter a trailing stop of 4.85 when your order is filled, then tighten it to 2.43 on a 4.86 gain. Earnings Report Date: N/A. Beta: N/A. Market-Cap: 1.439B. Optionable.

AN2 Therapeutics, Inc. (ANTX: Healthcare/Biotechnology) - SQUEEZE PLAY. Trader indecision has put ANTX 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 21.26 and a SELL short entry at 19.42. Now it's up to ANTX to show us which entry will be filled. Once the trade is underway place a 1.84 trailing stop, which can be tightened to 0.92 after you achieve a 2.86 profit. ANTX closed on Friday at 20.70. Earnings Report Date: N/A. Beta: N/A. Market-Cap: 615.647M. Not Optionable.

TECHNOLOGY SECTOR

Check Point Software Technologies Ltd. (CHKP: Technology/Software - Infrastructure) - NEW HIGH DIP. For a stock, the ladder to the top has rungs made up of 52-week highs. Each step up is followed by profit taking that usually causes a temporary pullback. The New High Dip setup uses these dips for safe entries into strong stocks. CHKP is now showing strength, so plan to BUY shares when this winner reaches our trigger at 148.45. Follow your position with a 7.85 trailing stop, which you can tighten to 3.93 when you have gained 4.52 points. CHKP last closed at 146.02. Earnings Report Date: Feb 12, 2024. Beta: N/A. Market-Cap: 17.554B. 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  
---------------- -------     --------    -------     ------  -------   

NOTE: The number of stock split announcments goes up during Bull markets, 
and goes down during Bear market cycles. There are currently no upcoming 
stock splits that meet RightLine's proprietary criteria for split ratio, 
trading volume and price action.      

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

"15 Ways To Trade Moving Averages"

Reading a chart without moving averages is like baking a cake without butter or eggs. Those simple lines above or below current price tell many tales, and their uses in market interpretation are unparalleled. Simply stated, they're the most valuable indicators in technical analysis.

You can trade without moving averages, but you do so at your own risk. After all, these lines represent median levels where your competition will make important buying or selling decisions. So it makes sense to predict what they're going to do before the fact, rather than afterward.

Here are 15 ways you can manage opportunity through moving averages:

1. The 20-day moving average commonly marks the short-term trend, the 50-day moving average the intermediate trend, and the 200-day moving average the long-term trend of the market.

2. These three settings represent natural boundaries for price pullbacks. Two forces empower those averages: First, they define levels where profit- and loss-taking should ebb following strong price movement. Second, their common recognition draws a crowd that perpetrates a self-fulfilling event whenever price approaches.

3. Moving averages generate false signals during range-bound markets because they're trend-following indicators that measure upward or downward momentum. They lose their power in any environment that shows a slow rate of price change.

4. The characteristic of moving averages changes as they flatten and roll over. The turn of an average toward horizontal signifies a loss of momentum for that time frame. This increases the odds that price will cross the average with relative ease. When a set of averages flatline and draw close to one another, price often swivels back and forth across the axis in a noisy pattern.

5. Moving averages emit continuous signals because they're plotted right on top of price. Their relative correlation with price development changes with each bar. They also exhibit active convergence-divergence relationships with all other forms of support and resistance.

6. Use exponential moving averages, or EMAs, for longer time frames but shift down to simple moving averages, or SMAs, for shorter ones. EMAs apply more weight to recent price change, while SMAs view each data point equally.

7. Short-term SMAs let traders spy on other market participants. The public uses simple moving average settings because they don't understand EMAs. Good intraday signals rely more on how the competition thinks than the technicals of the moment.

8. Place five-, eight- and 13-bar SMAs on intraday charts to measure short-term trend strength. In strong moves, the averages will line up and point in the same direction. But they flip over one at a time at highs and lows, until price finally surges through in the other direction.

9. Price location in relation to the 200-day moving average determines Long-term investor psychology. Bulls live above the 200-day moving average, while bears live below it. Sellers eat up rallies below this line in the sand, while buyers come to the rescue above it.

10. When the 50-day moving average pierces the 200-day moving average in either direction, it predicts a substantial shift in buying and selling behavior. The 50-day moving average rising above the 200-day moving average is called a Golden Cross, while the bearish piercing is called a Death Cross.

11. It's harder for price to break above a declining moving average than a rising moving average. Conversely, it's harder for price to drop through a rising moving average than a declining moving average.

12. Moving averages set to different time frames reveal trend velocity through their relationships with each other. Measure this with a classic Moving Average-Convergence-Divergence (MACD) indicator, or apply multiple averages to your charts and watch how they spread or contract over different time.

13. Place a 60-day volume moving average across green and red volume histograms in the lower chart pane to identify when specific sessions draw unexpected interest. The slope of the average also identifies hidden buying and selling pressure.

14. Don't use long-term moving averages to make short-term predictions because they force important data to lag current events. A trend may already be mature and nearing its end by the time a specific moving average issues a buy or sell signal.

15. Support and resistance mechanics develop between moving averages as they flip and roll. Look for one average to bounce on the other average, rather than break through it immediately. After a crossover finally takes place, that level becomes support or resistance for future price movement.

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

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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