Notes From The Editor

The Battle of the Exit Strategies: Scaling Out vs. All or None

Simple concepts usually work best in trading - especially when it comes to Exits. However, keeping it simple doesn't exclude Exit plans that contain important features - so long as each aspect is designed to accomplish a goal.

For example, every Exit Strategy should do three things - minimize losses, maximize profits, and limit the amount of profit you give back. You can minimize losses with an initial "sell-all" stop that protects you if the trade moves in the wrong direction, maximize profits with a "sell-all" trailing stop that allows for normal price fluctuations, and avoid giving back too much profit by tightening the trailing stop when you reach a certain profit target.

While this three-pronged approach specifically addresses each objective, one widespread strategy used by many traders does just the opposite. The basic idea is to exit your position in several planned increments as opposed to exiting the entire position at one time. This strategy is sometimes referred to as "Scaling Out." Like the first example it uses multiple features. However, instead of meeting the three objectives of any good Exit plan, it works against them. Here's how.

Lets say you open a position with 600 shares. Under the Scale Out plan you might sell 1/3 of them when you reached the break-even point for the trade. Then you would sell another third when you made a specific profit such as $1000. Then you might hold on to the remaining shares until you have a $2000 profit, or keep the position even longer and let the price run way up.

Although the Scale Out method is commonly thought to reduce losses and increase profits, it has the unfortunate quality of producing big losses and little profits. This is due to a not-so-obvious characteristic - Reverse Position Sizing.

Position Sizing protects you by limiting the amount of shares held when you are the most vulnerable. This reduces the total amount of loss. On the other hand, the Scaling Out exit plan guarantees that you will have the most shares in your position when your risk of loss is highest. This trait will quickly increase your losses.

Not only does Scaling Out increase your losses, it insures that you have the fewest shares in your position when your point gains are the highest. Instead of "locking in profits" as it first appears, scaling out locks in larger losses than if you exited your entire position at one time.

Bottom Line: Though Scaling Out is popular among traders, the defects in this Exit Strategy cause hidden damage to trading accounts. Intuitively it seems to be a clever thing to do, yet when you take a closer look you can see that it is quite destructive.

By the way - don't feel bad if you use the Scale Out method - you still have an Exit Strategy. That fact alone puts you in the top 20% of all traders. I confess that I believed in the scale out method for a long time because it seemed to make sense.

Trade well,

~ Thomas Sutton, Editor

P.S. I first wrote about this subject a few years ago, and since then have gotten some criticism over my point of view. I'm always willing to learn, so if you know of any research or studies that contradict my conclusions, please let me know!

Quick List

    
Stock     12/03     12/03      Buy      Short   Trailing Stops     Gain 
Symbol    Price      +/-      Entry     Entry   Initial/Tighten   Amount 
------  --------  --------  --------  --------  ---------------  --------

JWN       20.19     -0.37     20.96     19.11        1.85/0.93      2.72
CHGG      28.56     -0.39     29.27     26.94        2.33/1.17      1.86
EHTH      23.82     -0.65     24.95     22.72        2.23/1.12      5.14
IFS       24.28     -0.35     25.15     23.27        1.88/0.94      2.12
NUVL      19.97     -0.93     21.21     18.71         2.5/1.25      5.62

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

Stocks were lower on Friday, capping off a volatile week as the markets digested a mixed payroll report that showed job growth was considerably short of the mark, yet the jobless rate dropped and the labor force participation rate rose to the strongest level since March 2020. In other news, factory orders were well above expectations, and services sector growth in November set an all-time record high. In equities, shares of Marvell Technology (MRVL $84) were solidly higher after the semiconductor company beat earnings forecasts and delivered a positive outlook, while e-signature company DocuSign (DOCU $135) fell hard after coming up short on revenues and issuing weak guidance. Oil prices were lower, the USD/dollar closed near even, gold and treasuries advanced higher.

                      Friday                 On The Week      
                  --------------------   --------------------
Dow                 34,580.08   -59.71      -319.26    -0.91%
Nasdaq              15,085.47  -295.85      -406.19    -2.62%
S&P 500              4,538.43   -38.67       -56.19    -1.22%

NYSE Volume                      5.34B                       
NYSE Advancers                     915                       
NYSE Decliners                   2,439                       

Nasdaq Volume                    5.95B                       
Nasdaq Advancers                 1,052                       
Nasdaq Decliners                 3,612                       

                                 New Highs/Lows

                   11/26  11/29  11/30  12/01  12/02  12/03
                 --------------------------------------------
NYSE New Highs        20     35     26     35     17     28
NYSE New Lows        202    125    280    237    188    208
Nasdaq New Highs      34     57     46     63     31     27
Nasdaq New Lows      347    346    628    571    619    732
   

TRADER'S TIP: "Hi-Tech Trading Platforms"

A direct access trading platform will help a good trader make more money, but it does nothing for those who are still trying to grasp the basics of the stock market. Success in this business is more dependent on accurate chart interpretation than buying the newest hi-tech software or hardware.

Huge profits are made each month by long-time professional traders who still use the phone to place their orders and manage open positions. As your execution and trade management abilities improve, it becomes obvious that what you know is far more important to your bottom line than any state-of-the-art trading platform.

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 - 4538.43 December 3, 2021

52-Week High: 4743.83
52-Week Low: 3633.40
Daily Trend: DOWN
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 4924.49
Resistance 2: 4746.66
Resistance 1: 4642.54
Pivot: 4568.83
Support 1: 4464.71
Support 2: 4391.00
Support 3: 4213.17

NASDAQ Composite - 15085.47 December 3, 2021

52-Week High: 16212.23
52-Week Low: 12214.74
Daily Trend: DOWN
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 17087.31
Resistance 2: 16185.26
Resistance 1: 15635.36
Pivot: 15283.21
Support 1: 14733.31
Support 2: 14381.16
Support 3: 13479.11
        
Dow Industrials - 34580.08 December 3, 2021

52-Week High: 36565.73
52-Week Low: 29755.53
Daily Trend: DOWN
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 37186.85
Resistance 2: 35905.92
Resistance 1: 35243.00
Pivot: 34624.99
Support 1: 33962.07
Support 2: 33344.06
Support 3: 32063.13
 

Market Calendar

ECONOMIC REPORTS AND EVENTS (all times are Eastern):    

Monday, December 06, 2021:
06-Dec          None scheduled

Tuesday, December 07, 2021:
07-Dec  8:30 am   Trade deficit
07-Dec  8:30 am   Productivity revision (SAAR)
07-Dec  8:30 am   Unit labor costs revision (SAAR)
07-Dec   3 pm   Consumer credit (change)

Wednesday, December 08, 2021:
08-Dec  10 am   Job openings
08-Dec  10 am   Job quits

Thursday, December 09, 2021:
09-Dec  8:30 am   Initial jobless claims (regular state program)
09-Dec  8:30 am   Continuing jobless claims (regular state program)
09-Dec  10 am   Wholesale inventories (revision)
09-Dec  12 noon   Real household wealth
09-Dec  12 noon   Real domestic nonfinancial debt

Friday, December 10, 2021:
10-Dec  8:30 am   Consumer price index
10-Dec  8:30 am   Core inflation
10-Dec  8:30 am   CPI (year-over-year change)
10-Dec  10 am   UMich consumer sentiment index (preliminary)
10-Dec  10 am   Expected inflation, five-years (preliminary)
10-Dec   2 pm   Federal budget


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

TRADER'S TIP: "Check the Charts, Not the Chatters"

When it comes to market reversals, traders usually listen to the wrong sources. They often follow the news media when they would be much better off viewing the technical picture. Avoid the mind numbing chatter of self-appointed experts. These guys and gals are normally there to make money for themselves - not for you.

Stocks Covered in This Issue

CONSUMER CYCLICAL SECTOR

Nordstrom, Inc. (JWN: Consumer Cyclical/Department Stores) - SQUEEZE PLAY. Friday's trading session left JWN in a very narrow price range after buyers and sellers fought to a near stalemate. Both sides are looking for some traction, and a breakout either way could provide a nice gain in the short term. To get aboard, set your BUY trigger at 20.96 and your SELL short trigger at 19.11. One of the orders will be triggered by upcoming price action. When your market order is filled, cancel the remaining trigger and enter a 1.85 trailing stop. Once you have a 2.72 profit, reduce the stop to 0.93. Earnings Report Date: Feb 28, 2022. Beta: 2.39. Market-Cap: 3.216B. Optionable.

CONSUMER DEFENSIVE SECTOR

Chegg, Inc. (CHGG: Consumer Defensive/Education & Training Services) - SQUEEZE PLAY. Friday's narrow price range has created a potentially profitable setup in CHGG, 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 29.27 and a SELL short entry at 26.94. Let CHGG's price action determine your long or short entry. Once the order is filled, place a 2.33 trailing stop, and tighten it to 1.17 upon getting a 1.86 gain. CHGG closed Friday at 28.56. Earnings Report Date: Feb 07, 2022. Beta: 0.80. Market-Cap: 4.14B. Optionable.

FINANCIAL SERVICES SECTOR

eHealth, Inc. (EHTH: Financial Services/Insurance Brokers) - SQUEEZE PLAY. EHTH is stuck in a Bull/Bear deadlock. Fortunately for traders this impasse should be resolved soon, with one side or the other taking control. We want to be positioned for a potential quick move up or down, so get ready to catch this train with a BUY entry at 24.95 and a SELL short entry at 22.72. Once your trade is filled, enter a 2.23 trailing stop. Tighten it to 1.12 after a 5.14 gain. EHTH closed on Friday at 23.82. Earnings Report Date: Feb 16, 2022. Beta: -0.21. Market-Cap: 628.565M. Optionable.

Intercorp Financial Services Inc. (IFS: Financial Services/Banks-Regional) - SQUEEZE PLAY. Traders are feeling the pressure as IFS's intra-day price range on Friday shrunk to the narrowest spread in over a week. The tension between buyers and sellers should provide enough pent-up engergy for a breakout move in the days ahead, so get ready to trade with the new trend. To achieve that, place a BUY entry at 25.15 and a SELL short entry at 23.27. IFS's price movement will decide which entry is filled. As soon as you're in the trade, enter a 1.88 trailing stop. Tighten it to 0.94 after you get a 2.12 gain. IFS closed Friday at 24.28. Earnings Report Date: N/A. Beta: 0.89. Market-Cap: 3.015B. Not Optionable.

HEALTHCARE SECTOR

Nuvalent, Inc. (NUVL: Healthcare/Biotechnology) - SQUEEZE PLAY. The ticker for Friday's session shows NUVL is now stuck in a tight price band. With the cyclical contraction and expansion nature of volatility in force, we should see a new period of price expansion in the days ahead. To improve the odds of catching the next directional wave, place a BUY trigger at 21.21 and a SELL short trigger at 18.71. When NUVL starts moving out of its narrow range, your order will be triggered. Once you're in the trade, cancel the opposing trigger and set a 2.5 trailing stop. Upon reaching a 5.62 profit, resize the stop to 1.25. Earnings Report Date: N/A. Beta: N/A. Market-Cap: 869.654M. Not 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  
---------------- -------     --------    -------     ------  -------   
PAM Transport     PTSI      07/15/2021  08/17/2021  2-for-1   No
First Savings     FSFG      08/16/2021  09/16/2021  3-for-1   No
Raymond James     RJF       08/25/2021  09/21/2021  3-for-2   Yes
Inmode Ltd        INMD      09/17/2021  10/01/2021  2-for-1   Yes
Ntuitive Surgical ISRG      08/05/2021  10/05/2021  3-for-1   Yes
Microchip Tech    MCHP      08/26/2021  10/13/2021  2-for-1   Yes
Arista Networks   ANET      11/1/2021   11/18/2021  4-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

Intra-day Traders: "Unlock The Secrets Of The Ticker Tape"

Many good traders lose money because of tape-reading incompetence. After all, the markets are little more than a set of numbers and their rate of change over time. Watching how these numbers interact offers traders a precise method for short-term prediction. It works because the flow of the tape reveals the crowd's intentions.

Technical analysis alone won't make you a profitable trader. You still need to learn the fine art of reading the tape. That could be a shock after all of the time you've spent studying the charts and probing the indicators. Of course you can continue to trade without the tape, but you do so at your own risk.

Charts often paint pretty pictures that trigger perfectly wrong signals, but the tape never lies. This goes back to the old admonition to trade what you see, not what you believe. Once you learn how to read the tape, it becomes much harder to get fooled by the whipsaws that are tossing other traders around.

The bottom line is that price and volume provide most of the information needed to play the markets successfully. The flow of buying and selling pressure reveals forces that remain hidden on the charts and in the news flow. It reflects the real activities of market players, as opposed to the smoke and mirrors being offered to the public.

Mastering the ticker tape is tough, because there's no definitive book or formula on the subject. It can only be learned through long periods of personal observation. But once you develop your tape-reading skills, you'll have a lifetime advantage over other traders, because you're accessing the hidden pulse of the markets.

Here are 15 tricks to learning the secrets of the ticker tape.

1. Start your education by memorizing key levels on your favorite charts. Then watch the tape closely when price approaches these pivot points. Record your observations and see if you can predict reversals before the crowd does.

2. Most tape signals help you anticipate the unexpected. For example, a bull trap is set when volume dries up for no reason after a breakout. The tape reader has the advantage, because this occurs long before a reversal shows up on the chart.

3. Study the tape with one eye on the clock, because swings tend to occur in predictable cycles. For example, watch for the "third bar reversal" about 11 minutes into the new day. Follow the tape in whatever direction price moves at the open, then see if momentum fades at the critical time.

4. Interpret the crowd's excitement level with an average volume reading next to the real-time volume on your watch list. Look for stocks that trade well above their average volume, because this is where the real action will be for the day.

5. Look for divergences between market sentiment and the tape flow. Are interested buyers holding up prices in the middle of a broad selloff? Or do the rally fires fizzle when everything else is moving higher?

6. Ask if price action matches your expectations. Look for buyers at breakout levels and sellers at breakdown levels. When they don't show up, stand aside or fade the move. Don't be patient. Contrarians step in immediately when the crowd doesn't appear at price pivots.

7. Market makers and specialists use knowledge of the order book to move markets in whatever direction yields the greatest volume. They routinely manipulate crowd emotions against order flow to shake weak hands out of positions.

8. Use Nasdaq Level II as a contrary indicator. Its purpose is to fool the public into making bad decisions. The best feedback from this tool comes when you see a few shares hold a market up or down for extended periods. It means someone important is hiding a large order.

9. Ignore the players who are lined up on either side of the spread, and track only the depth of their interest through many tiers. Pay attention to whoever steps in to fill the gap when the spread opens more than a few cents. That's the highly motivated player who will most likely move the market.

10. Get out of the way when NYSE specialists show big size on one side of the market. They intend to push price through many tiers until their orders gets filled. Alternatively, scalpers can trade with size until it works out of the system.

11. Use the opening price principle. The opening tick on the SP 500 futures remains a pivot number through the entire session. Draw a line across it to remind yourself where it is. Then use opening price breakouts, breakdowns and reversals as trading signals.

12. Closely watch the relationship between current price and the daily range. A stock that holds high within its range has hidden strength, while a stock that holds low has hidden weakness.

13. Interpreting the bid/ask spread requires a different skill-set than reading price. Keep in mind that most spread movement is pure noise. Watch for those few times when the spread widens and price surges farther on fewer shares. That's where directional signals will appear.

14. Follow the professionals in quiet times and the public in wild times. Insiders push price in the direction that sets up their accounts for the most gain, but they lose control of the tape when the public enters the market in force.

15. Keep one eye on market breadth and exchange tick, and the other on the ticker tape. Interrelationships between these forces generate convergence and divergence that predict market direction.

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

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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