Notes From The Editor

Getting Started: Trading the Indexes (Part I)

Last week's discussion centered around using filters to weed out the thousands of equities that aren't likely to make good trade candidates. However, this is only one step. Sorting though all the remaining candidates to find the best stocks to buy (or sell) is the meat-and- potatoes of trade selection. Traders use a whole boatload of strategies to accomplish this.

There's one approach that skips past this step. In fact, it only deals with three different stocks. The simplicity makes a great strategy for beginner traders. However, many veterans also successfully use this method.

Tracking stocks closely follow the movement of a basket of equities. Some are tied to a certain group of industry stocks, while others might follow equities from a certain region of the globe. The three most commonly-traded tracking stocks are tied to the major indexes: the S&P 500, Dow Jones, and Nasdaq.

When one buys the "Spiders" (SPY), they're getting exposure to all 500 stocks in the S&P 500. Investors use as it as a way to diversify and invest in the broader market. Traders with various timeframes use it to profit from shorter-term gyrations. The "Diamonds" (DIA) track the Dow Industrials, while the "Q's" (QQQ) follow the tech-laden Nasdaq.

A bit of clarification is needed here. Technically, the Q's are the tracking stock for the Nasdaq-100. But since these 100 stocks tend to drive the majority of the movement on the Nasdaq Composite, it's essentially the same as following the Composite. This is borne out by a comparison between daily charts for the Nasdaq Composite and QQQ, which show a very close correlation.

The beauty in trading the index tracking stocks is that these tend to provide great technical entries. With so many market participants watching the major indices, the psychological factors that contribute to the reliability of technical set-ups are stronger. To put it more simply, when the entire market is watching a key support/resistance level, it's more likely to hold. And if it's violated, the short-term directional move can be very strong.

Along with the tendency to produce strong technical set-ups, there are other advantages to playing tracking stocks. The diversification that comes with buying a basket of equities means that you have protection from a sell-off in any particular stock. The high liquidity of the SPY, DIA, and QQQ means that spreads are tight and fills are nearly instantaneous.

We'll explore tracking stocks in further detail next weekend, taking a closer look at how they can be used in a profitable trading strategy.

Here's to profits,

Kent Barton
Senior Analyst

Quick List

    
Stock     12/08     12/08      Buy      Short   Trailing Stops     Gain 
Symbol    Price      +/-      Entry     Entry   Initial/Tighten   Amount 
------  --------  --------  --------  --------  ---------------  --------

MANU      19.51      0.15                                    /         0
VSCO      26.25     -0.49     27.08     25.18         1.9/0.95       1.9
ARCT      23.79     -0.23     25.02     23.03           1.99/1      3.34
CECO      19.66      0.11     20.11                  1.38/0.69      1.84
KD        18.41      0.09     18.79                  1.17/0.59      1.02

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 concluded the week on a positive note, digesting an employment report slightly stronger than anticipated. Concurrently, interest rates saw an uptick, with the 10-year Treasury yield rebounding above 4.2%, a recovery from this week's dip to 4.1%. The yield curve displayed a flattening trend, especially noticeable in the heightened 2-year yields, reflecting skepticism about the market's expectation of early 2024 Fed rate cuts. Despite this, equities focused on the positive aspect of the jobs data, highlighting a resilient labor market that bolsters the case against an imminent recession.

The focal point of Friday's market dynamics was the November jobs report, revealing the addition of 199,000 payrolls. Adjusting for the impact of returning strikers, hiring remained close to October's figures. Notably, the growing labor force pushed the unemployment rate down to 3.7%. A critical figure was the wage trend, exceeding expectations on a monthly basis but maintaining a 4% year-over-year rate, the slowest since the summer of 2021.

The report presented a mixed picture, offering both bullish and bearish elements. While the drop in the unemployment rate and stable wage growth raises concerns about inflation and potential Fed rate hikes, it's evident that the labor market is softening without jeopardizing ongoing consumer support.

As employment and inflation dynamics shape the 2024 market landscape, the recent jobs report directs attention to upcoming inflation data. The next gauge will be the consumer price index (CPI) report on Tuesday, December 12. Consensus anticipates core CPI to stabilize at 4%. Despite progress over the past year, there's room for improvement. Any indication in this report that inflationary pressures persist may trigger adverse reactions in the stock and bond markets, potentially delaying the expected timeline for Fed rate cuts. Conversely, signs of easing underlying inflation drivers would be favorable.

Housing prices, while persistent, show signs of moderating. Overall, the expectation is for inflation to continue its downward trajectory in the coming year, aligning with the view that the Fed can initiate policy easing later in 2024.

                      Friday                 On The Week      
                  --------------------   --------------------
Dow                 36,247.87   130.49        +2.37     0.01%
Nasdaq              14,403.97    63.98       +98.94     0.69%
S&P 500              4,604.37    18.78        +9.74     0.21%

NYSE Volume                      3.72B                       
NYSE Advancers                   1,614                       
NYSE Decliners                   1,213                       

Nasdaq Volume                    5.44B                       
Nasdaq Advancers                 2,373                       
Nasdaq Decliners                 1,883                       

                                 New Highs/Lows

                   12/01  12/04  12/05  12/06  12/07  12/08
                 --------------------------------------------
NYSE New Highs       179    157    103    136     62    101
NYSE New Lows         16     15     19     28     35     19
Nasdaq New Highs     168    166     89    137    101    145
Nasdaq New Lows       99     78     74    107    122    108
   

TRADER'S TIP: "The Float"

A stock's float is the total number of shares available to the public for trading. "Available" equals all shares outstanding less the stock owned by insiders such as executives and management, 5% Owners (anyone who owns 5% or more) and Rule 144 Shares. Stocks with a small float are more volatile than stocks with large floats. This is because a large buy or sell order can influence a small float stock price dramatically. Since small-cap stocks usually have fewer shares outstanding than large-cap companies, their float is smaller. This tends to cause higher volatility. For a look at Rule 144, you can visit the SEC website at the following link. Warning - be prepared for a lot of legal jargon... http://www.sec.gov/about/forms/rule144.pdf.

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 - 4604.37 December 8, 2023

52-Week High: 4609.23
52-Week Low: 3764.49
Daily Trend: DOWN
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 4712.15
Resistance 2: 4649.42
Resistance 1: 4626.89
Pivot: 4586.70
Support 1: 4564.17
Support 2: 4523.97
Support 3: 4461.24

NASDAQ Composite - 14403.97 December 8, 2023

52-Week High: 14446.55
52-Week Low: 10207.47
Daily Trend: UP
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 15009.93
Resistance 2: 14651.53
Resistance 1: 14527.75
Pivot: 14293.13
Support 1: 14169.35
Support 2: 13934.73
Support 3: 13576.33
        
Dow Industrials - 36247.87 December 8, 2023

52-Week High: 36296.20
52-Week Low: 31429.82
Daily Trend: DOWN
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 36755.67
Resistance 2: 36470.32
Resistance 1: 36359.09
Pivot: 36184.97
Support 1: 36073.74
Support 2: 35899.62
Support 3: 35614.27
 

Market Calendar

ECONOMIC REPORTS AND EVENTS (all times are Eastern):    

MONDAY, DEC. 11					
None scheduled
				
TUESDAY, DEC. 12					
8:30 am	Consumer price index	Nov.		
8:30 am	Core CPI	Nov.		
8:30 am	CPI year over year			
8:30 am	Core CPI year over year			
2:00 pm	Monthly U.S. federal budget	Nov.
		
WEDNESDAY, DEC. 13					
8:30 am	Producer price index	Nov.		
8"30 am	Core PPI	Nov.		
8:30 am	PPI year over year			
8:30 am	Core PPI year over year			
2:00 pm	FOMC interest-rate decision				
2:30 pm	Fed Chairman Jerome Powell press conference
				
THURSDAY, DEC. 14					
8:30 am	Initial jobless claims	Dec. 
8:30 am	Import price index	Nov.		
8:30 am	Import price index minus fuel	Nov.	
8:30 am	U.S. retail sales	Nov.		
8:30 am	Retail sales minus autos	Nov.		
10:00 am	Business inventories	Nov.
		
FRIDAY, DEC. 15					
8:30 am	Empire State manufacturing survey	Dec.	
9:15 am	Industrial production	Nov.		
9:15 am	Capacity utilization	Nov.
		
For a chart of typical Up or Down market reactions to specific major US economic reports 
go to:  Economic Indicator Effects

TRADER'S TIP: "Inside Game"

An Inside Day occurs when the entire price action for the day is within the range of the previous day. This indicates that supply and demand has become balanced, and traders are indecisive over which direction to go. In theory, when the market overcomes this indecision by penetrating either the high or low of the Inside Day, it is indicating the direction of the next short-term move.

Stocks Covered in This Issue

COMMUNICATION SERVICES SECTOR

Manchester United plc (MANU: Communication Services/Entertainment) - BULLISH BOUNCE. Among other strengths, the Bullish Bounce protects traders from buying a stock "at the top" of its current cycle. The entry into this setup always takes place in upward-moving stocks that have retreated a bit under normal conditions. Now sitting at 19.51, MANU is on our radar for a BUY entry at . If you purchase shares of MANU, be sure to also place a trailing stop of . Snug it up to on a 0 gain. Earnings Report Date: Dec 08, 2023. Beta: 0.74. Market-Cap: 3.17B. Optionable.

CONSUMER CYCLICAL SECTOR

Victoria's Secret & Co. (VSCO: Consumer Cyclical/Apparel Retail) - SQUEEZE PLAY. VSCO shareholders know what it feels like to be squeezed. Friday's slim price range reveals uncertainty on both sides of the table, a situation which often resolves itself by either Bears or Bulls quickly gaining a clear advantage. The question is "who will win?" Near-term market action tell us whether we should sell short or we should buy shares instead. VSCO closed Friday at 26.25. The plan is to enter in the right direction by placing a BUY trigger at 27.08 and a SELL short trigger at 25.18. Once VSCO establishes direction, place your triggered order. As soon as you are in the trade, place a trailing stop in the amount of 1.9. After you've collected a 1.9 profit, tighten the stop to 0.95. Earnings Report Date: Mar 03, 2024. Beta: 2.36. Market-Cap: 2.033B. Optionable.

HEALTHCARE SECTOR

Arcturus Therapeutics Holdings Inc. (ARCT: Healthcare/Biotechnology) - SQUEEZE PLAY. Sometimes when Bulls and Bears face off in the market arena for a typical day-long battle, there is no clear winner. This is evident when the daily price range contracts to an unusually narrow state. ARCT found itself in this condition on Friday when neither buyers or sellers were able to push ahead. This setup provides traders a chance to hop on board the next breakout - whether it's to the upside or down - with little risk of loss. To do this place a BUY order at 25.02 and a SELL short trigger at 23.03. When ARCT moves outside of Friday's range, one of the orders will be filled. Once you hold a position of shares, cancel the unfilled order and place a 1.99 trailing stop. After you've got a 3.34 profit, tighten the stop to 1. ARCT closed at 23.79 on Friday. Earnings Report Date: N/A. Beta: 2.58. Market-Cap: 635.747M. Optionable.

INDUSTRIALS SECTOR

CECO Environmental Corp. (CECO: Industrials/Pollution & Treatment Controls) - BULLISH BOUNCE. Everyone familiar with price charts knows that a stock tends to bounce its way higher rather than move in a straight line. The lower levels of these short-term rebounds offer a safe and often early entry into stocks that are in the process of establishing longer-term uptrends. CECO's reaction to support on Friday created a Bullish Bounce setup with a BUY entry trigger at 20.11. Use a 1.38 trailing stop, which should work well with CECO's typical daily range. Tighten it to 0.69 on a 1.84 profit. CECO closed at 19.66 on Friday. Earnings Report Date: Mar 04, 2024. Beta: 1.24. Market-Cap: 684.414M. Optionable.

TECHNOLOGY SECTOR

Kyndryl Holdings, Inc. (KD: Technology/Information Technology Services) - BULLISH BOUNCE. This trader-friendly setup turns repetitive stock behavior into real profits. Based on the tendency for up-trending stocks to drop briefly and then resume the up-trend, the Bullish Bounce places traders into excellent stocks when conditions are primed for more skyward movement. KD's current price action near moving average support signals a potential BUY entry at 18.79, followed by a 1.17 trailing stop which can be tightened to 0.59 upon earning 1.02. KD closed Friday at 18.41. Earnings Report Date: Feb 05, 2024. Beta: 1.61. Market-Cap: 4.224B. 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

Profiting From Psychological Support and Resistance

Sometimes the stock market seems to take on a life of its own. Rather than perceiving price movement as a reflection of human emotions, traders often come to view the whole process as mechanistic and impersonal. Actually, this viewpoint isn't entirely without merit. After all, a healthy chunk of stock trading volume each day is based on the cold calculations of computerized programs.

But someone has to tell those computers what to do - artificial intelligence hasn't evolved to the point where machines can make all of their own decisions. Ultimately, every buy and sell order that enters the market comes from somebody's expectation that a stock or market will move higher or lower. The participation of thousands of traders anticipating a certain price movement often creates a "herd mentality" where clear levels of support and resistance can be identified.

"Psychological" levels are one of the most common - and intuitive - forms of support and resistance. Their existence stems from the simple fact that humans give special significance to round numbers. Specifically, stocks tend to find support/resistance at increments of 10. This tendency is even stronger at major "milestones" such as 50 and 100.

Higher-valued indexes also find areas of psychological significance. The most striking example is Dow 10,000. Take a look at the price action in 2005, and you'll see that a 30-month rally started after bouncing from that level in April of the same year.

When it comes to stocks, look for price action to level out on decreasing volume as the equity approaches a round number. Like most forms of support and resistance, these zones of congestion aren't set in stone - they might be pierced several times before a breakout or breakdown occurs. Increased volume and confirmation from technical indicators such as MACD and stochastics help to differentiate "head fakes" from the more meaningful moves.

In addition to increments of 10 (40, 50, 60, etc), "minor" psychological support and resistance sometimes develops at the mid-point between those levels (45, 55, 65, and so on). For stocks trading in the single digits, 5.00 and 10.00 can be formidable resistance levels.

Daily Chart - Best Buy (BBY):

This chart of Best Buy should help to illustrate these tendencies. Let's break down the various points of interest:

1.) BBY developed support near 50 in late-January/early-February 2004.

2.) 55 emerged as a stubborn resistance level.

3.) BBY plummeted through the support at 50. This breakdown was accompanied by higher-than-average volume; a good sign that the move was not a head-fake.

4.) The sell-off continued until shares found support at 45.

5.) A breakout attempt was made in late-April 2004 as BBY moved through resistance at 55. However, without an uptick in volume the move had little conviction. The stock was quickly pushed back below resistance.

Psychological levels are especially helpful when it comes to gauging where a stock might go once it hits the clear air space of all-time highs. An equity trading in "blue-sky territory" has no technical resistance, but does face potential obstacles at increments of 10, and to a lesser extent 5.

Daily Chart - eBay Inc. (EBAY):

Something else to keep in mind is the strong magnetic pull of the 100-dollar price level. A good rule of thumb is that once a stock hits 90, odds favor a continued move up to 100. It's a sort of self-fulfilling prophecy; potential sellers expect more upside, so they stay on the sidelines. Meanwhile, shareholders refrain from taking profits until that logical upside target is reached.

Once you get the hang of it, it's easy to incorporate psychological levels into your chart analysis. Here are some things to look for:

- Is the stock trading at or near all-time highs? If so, has it already shown a tendency to find resistance at 5-dollar and 10-dollar increments?

- How has price action reacted as psychological levels were approached? Does the stock have a tendency to hesitate and gyrate near the round number, or does it tend to easily slice through those levels?

- Note how volume accompanies price action as shares approach psychological support/resistance. Certain patterns often repeat themselves. Once recognized, they can be used to help anticipate future movement.

- Check to see if other technical indicators such as stochastics, MACD, and RSI have tended to provide confirmation for moves above and below psychological levels.

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.

Disclaimer

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The publishers of The RightLine Report recommend that anyone trading securities should do so with caution, exercise prudent trading discipline and have a personal risk management strategy in place before doing so. It is possible at this or some subsequent date, the publishers and staff of The Pro Right Line Corp. may own, buy or sell securities presented. The Pro Right Line Corp. is not a financial advisory service. Its publishers, owners or investors, are not liable for any losses or damages, monetary or otherwise, that result from the content of The RightLine Report. Past RightLine Report performance may not be indicative of future performance.

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