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     02/17     02/17      Buy      Short   Trailing Stops     Gain 
Symbol    Price      +/-      Entry     Entry   Initial/Tighten   Amount 
------  --------  --------  --------  --------  ---------------  --------

MMYT      26.59     -0.84                25.7        1.93/0.97      2.46
BLBD      20.26      0.14      20.6     19.24        1.36/0.68      1.66
XNCR      35.41      0.56     36.15                  2.45/1.23      3.12
HCCI      38.12      0.52     38.72                  2.43/1.22      2.06
INVH      32.63      0.04     33.12                  2.17/1.09      1.44

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

The top US stock indexes were mixed on Friday, with the Dow closing higher while the S&P 500 and Nasdaq finished lower. Inflation is still the primary market concern, as the economic calendar showed headline import price inflation dropped more than expected in January, though if you exclude petroleum it unexpectedly increased. In addition, recession uncertainty flames were fanned by a tenth-straight monthly decline in the Leading Economic Index. In equities, equipment manufacturer Deere & Company (DE $433)beat estimates and upped its guidance, while semiconducter maker Applied Materials (AMAT $115) also outperformed forecasts and announced a favorable outlook. Oil prices, gold and reasury yields were all lower,the USD/dollar ended the session near even.

                      Friday                 On The Week      
                  --------------------   --------------------
Dow                 33,826.69   129.84       -42.58    -0.13%
Nasdaq              11,787.27   -68.56       +69.15     0.59%
S&P 500              4,079.09   -11.32       -11.37    -0.28%

NYSE Volume                      4.06B                       
NYSE Advancers                   1,309                       
NYSE Decliners                   1,713                       

Nasdaq Volume                    4.94B                       
Nasdaq Advancers                 2,345                       
Nasdaq Decliners                 2,111                       

                                 New Highs/Lows

                   02/10  02/13  02/14  02/15  02/16  02/17
                 --------------------------------------------
NYSE New Highs        42     87    102     84     80     62
NYSE New Lows         15     13     12      7     15     10
Nasdaq New Highs      61     82     86     91     96     89
Nasdaq New Lows       82     67     83     63     67     77
   

TRADER'S TIP: "Extreme Bids"

When the market is closed, level II quotes will often show an extremely low and extremely high bid far from the current offer. Although neither bid are likely to be filled, they are usually there because market makers are required to provide a two-sided quote. By entering a bid and offer far away from the National Best Bid Offer, it ensures they won't get filled. This is one way market makers satisfy the two-sided quote rule without being active in the stock. Another way to view it is that the market maker has no customer orders for that particular stock.

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 - 4079.09 February 17, 2023

52-Week High: 4637.30
52-Week Low: 3491.58
Daily Trend: DOWN
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 4319.24
Resistance 2: 4207.42
Resistance 1: 4143.25
Pivot: 4095.60
Support 1: 4031.43
Support 2: 3983.78
Support 3: 3871.96

NASDAQ Composite - 11787.27 February 17, 2023

52-Week High: 14646.90
52-Week Low: 10088.83
Daily Trend: UP
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 12640.08
Resistance 2: 12242.00
Resistance 1: 12014.63
Pivot: 11843.92
Support 1: 11616.55
Support 2: 11445.84
Support 3: 11047.76
        
Dow Industrials - 33826.69 February 17, 2023

52-Week High: 35492.22
52-Week Low: 28660.94
Daily Trend: DOWN
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 35519.44
Resistance 2: 34705.70
Resistance 1: 34266.19
Pivot: 33891.96
Support 1: 33452.45
Support 2: 33078.22
Support 3: 32264.48
 

Market Calendar

ECONOMIC REPORTS AND EVENTS (all times are Eastern):    

Monday, February 20, 2023:
20-Feb   None scheduled - MARKET CLOSED FOR PRESIDENTS DAY

Tuesday, February 21, 2023:
21-Feb  9:45 am  S&P flash U.S. services PMI
21-Feb  9:45 am   S&P flash U.S. manufacturing PMI
21-Feb  10:00 am   Existing home sales

Wednesday, February 22, 2023:
22-Feb   2 pm   FOMC minutes of Feb.1 meeting

Thursday, February 23, 2023:
23-Feb  8:30 am   Initial jobless claims
23-Feb  8:30 am   GDP
23-Feb  10:50 am   Atlanta Fed President Bostic speaks

Friday, February 24, 2023:
24-Feb  8:30 am   Consumer spending (nominal)
24-Feb  8:30 am   Personal income (nominal)
24-Feb  8:30 am   PCE index
24-Feb  8:30 am   Core PCE index
24-Feb  8:30 am   Core PCE (year-over-year)
24-Feb  10 am   New home sales
24-Feb  10 am   Consumer sentiment (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: "Average Down?"

"While most investors buy stocks that have performed well, investors who already own a stock are more likely to buy additional shares if the price is lower than their original purchase price."

~University of California at Davis -Odean Study (1998)

Question: Should I average down?

Answer: Buying more shares just because the price has dropped usually isn't a good idea. As a rule of thumb, only add shares to an existing position when the trade has moved in your favor.

Stocks Covered in This Issue

CONSUMER CYCLICAL SECTOR

MakeMyTrip Limited (MMYT: Consumer Cyclical/Travel Services) - BEARISH U-TURN. This short setup turns common stock behavior into profits. Grounded in the tendency for down-trending stocks to bounce briefly and then return to the familiar down-trend, the Bearish U-Turn points traders to weak stocks when conditions are calling for more downward price action. MMYT's behavior on Friday near moving average support signals a potential SELL short entry at 25.7, followed by a 1.93 trailing stop which can be tightened to 0.97 upon earning 2.46. MMYT closed Friday at 26.59. Earnings Report Date: N/A. Beta: 1.18. Market-Cap: 2.799B. Optionable.

Blue Bird Corporation (BLBD: Consumer Cyclical/Auto Manufacturers) - SQUEEZE PLAY. Traders are feeling the pressure as BLBD'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 20.6 and a SELL short entry at 19.24. BLBD's price movement will decide which entry is filled. As soon as you're in the trade, enter a 1.36 trailing stop. Tighten it to 0.68 after you get a 1.66 gain. BLBD closed Friday at 20.26. Earnings Report Date: May 10, 2023. Beta: 1.40. Market-Cap: 648.97M. Optionable.

HEALTHCARE SECTOR

Xencor, Inc. (XNCR: Healthcare/Biotechnology) - BULLISH BOUNCE. Looking a bit frayed after sliding downhill in recent sessions, on Friday XNCR seemed intent on initiating a rebound. With moving average support nearby, XNCR 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 36.15. Manage risk with a 2.45 stop. Tighten your stop to 1.23 when you have a 3.12 profit. XNCR ended the day at 35.41. Earnings Report Date: Feb 23, 2023. Beta: 0.72. Market-Cap: 2.122B. Optionable.

INDUSTRIALS SECTOR

Heritage-Crystal Clean, Inc (HCCI: Industrials/Waste Management) - BULLISH BOUNCE. Up-trending stocks like HCCI have a tendency to bounce their way skyward rather than travel higher in a straight line. After touching down to a moving average support level on Friday, HCCI is poised to lift off again. To take advantage of this setup, prepare to BUY shares at 38.72 if positive price action occurs. As always, follow your entry with a trailing stop. A 2.43 trailer should work well with HCCI. Tighten it to 1.22 on a 2.06 gainer. Earnings Report Date: Mar 01, 2023. Beta: 1.20. Market-Cap: 921.639M. Optionable.

REAL ESTATE SECTOR

Invitation Homes Inc. (INVH: Real Estate/REIT-Residential) - 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 32.63. Anticipate the rebound to continue, and be ready to buy INVH at 33.12. Follow your entry with a trailing stop of 2.17 which can be tightened to 1.09 on a 1.44 profit. Earnings Report Date: Apr 25, 2023. Beta: 0.89. Market-Cap: 20.033B. 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  
---------------- -------     --------    -------     ------  -------   

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

Stops: One Size Doesn't Fit All

Knowing when to get out of a trade is every bit as important as knowing when to get in. Since the majority of our exits come as a result of our stops getting triggered, understanding the concepts and strategies behind setting those stops is critical to success.

Stops are the trader's first line of defense against trades that turn against you. Traders with longer time horizons will typically use much wider stops than short-term traders, so the best stop amount is not the same for everyone. As traders we are looking for stops that will take us out of a position before we incur significant losses, yet keep us in a trade if the stock is just wavering slightly before moving higher.

In this discussion we are assuming that traders are buying long positions rather than going short. However when going short the same concepts still apply, but in reverse.

When buying, it's usually best to set stops just below some type of support. When setting stops we have to identify the most significant support levels near the current price of the stock. At times the DMA (Daily Moving Average) will offer the strongest support, while in other cases a trend line or previous specific price level may provide stronger support.

Sometimes the best stop is the one set just below a specific price level. You may find that when a stock's price falls to a certain price level, demand increases and buyers begin to buy. This creates a "floor" or support level.

In contrast, you will find instances where a stock's price rises to a level where demand decreases and shareholders begin to sell. This is the "ceiling" or resistance level. The more times that the stock has bounced from a specific price level, the stronger the support or resistance.

When you see stocks that seem to have little or no consistent trend for any period of time, look to see if they tend to bounce back and forth between specific support and resistance points. If they do, these stocks can present great plays for short-term traders who buy just as the stock bounces off support.

Set your stop based on the daily trading range and continually move it upward using a trailing stop (see below) until it approaches resistance. Then tighten your stop. Once stopped out, wait for the next bounce off support and then repeat the process. Some traders will try to double the benefit offered by these range-bound stocks by going short as the stock bounces down from resistance and long on the bounce up from support.

If you buy a stock when it is breaking out to new highs, setting your stop at support may mean that you'll be exposed to quite a loss by the time the stock drops back to that level. Be sure to lower your position size so that the actual dollar risk is lessened.

Traders who intend to set their stops at one of these support levels should consider waiting for a pullback, and then buy on a bounce off of support rather than buying the breakout.

Buying breakouts is a momentum player's strategy. Very short term momentum traders often watch the stock as it climbs higher, set a close trailing stop mentally, and stay ready to pull the trigger when the stock slows or reverses its momentum.

As mentioned above, shorter-term traders normally use tighter stops. Using tighter stops translates into smaller losses if the stock turns south, but also increases the probability that you'll get jiggled out on a quick drop before the stock climbs higher. While these "unwanted" exits can sometimes be frustrating, they are just a part of the game for short-term traders.

NOTE: You can safely use larger stops by reducing your position size. The RightLine Risk Calculator makes it easy to select the optimum number of shares for a particular stop size.

We often talk about "Trailing Stops." A trailing stop is a stop that you move upward as the price of a stock appreciates. Here's how it works. You initially set a stop to minimize losses. Then as time goes on the trailing stop is adjusted in the profitable direction of the trade, which protects your gains.

Note that some brokers may not allow you to set an automatic "trailing stop." Depending on your broker, you may have to set a stop, and then when the stock appreciates, you cancel the initial stop and replace it with another higher stop. You then continue to move it up higher to protect your profit as the stock advances.

Some Pointers on Using Stops:

1. Decide where you will set your stop BEFORE YOU BUY.

2. Once you determine where to set your stop, calculate how many shares you can buy (position size) so that you will never risk more than 2% of your trading capital in one trade.

3. Set the stop the instant your buy order gets filled.

4. Move stops up as the stock rises, first to break even, then to protect profits. On a long position, NEVER lower a stop - only raise it.

5. As the stock moves up sharply, and looks like it may be "topping out" or if market conditions become unfavorable, tighten your stop, which will effectively employ an "up or out" strategy.

Different Stop Order Types

Note the difference between a stop-loss order and a stop-limit order. We recommend using "stop loss orders" rather than "stop-limit orders."

- Stop-Loss Orders

A stop-loss order is a sell order that will automatically turn into a market order to sell if the stop price is hit. A stop-loss order turns into a market order to sell when the stock's price reaches the stop price that you've set. This means that the stock will immediately be sold at the best available market price, regardless of what that price is, once your stop price is reached. If what you really want is to sell a stock if it falls to $X, you must use a stop market order.

- Stop-Limit Orders

A stop-limit order is a sell order that turns into a limit order to sell at a predetermined price after the stop price is hit. A limit order says in effect that you will sell only at a certain price or better. If the stock is dropping quickly or is gapped over, you may not be filled at your limit price and the stock could plummet as you continue to hold your shares.

Keep in mind that a stop-limit order may not fill even if the stock reaches the limit price. All limit orders are filled in sequence by the exchanges, so if the price changes due to the number of orders put in before yours, your order may not be filled.

More Pointers on Setting Stops

Another strategy is to set a stop below the previous or current day's low price. This technique is more effective on stocks with low volatility. It is a short-term approach for those who don't like to set wide stops. Once in a profitable position, some intermediate-traders may consider widening the stop loss or loosening the "trailer."

When you look at the chart of a stock, try to see which type of support and resistance has been strongest in the past. Probably the most important question you should ask yourself is "What level would I expect the stock to bounce up from?" The answer usually gives you a price level just above where you should set your stop.

- Average True Range (ATR)

Another good method is to take the Average True Range (ATR) over a number of days, multiply it by a chosen factor, and then place the stop an equal distance from the entry point of the trade. In order to prevent being stopped out by normal price movement, it is usually best to place the stop more than one ATR from the entry price. The main advantage of using an ATR stop is that it adapts very well to the current market environment. The distance from the entry point to the stop increases when market volatility is high, and decreases when volatility drops.

Most problems with the ATR Stop tend to occur when the short term ATR becomes much smaller than normal, and the narrow range stops result in being stopped out of the trade too soon. To prevent this, you can calculate two ATR stops - a shorter term 3 or 4 day ATR and a longer term 15 to 20 day ATR. Set your stops using whichever is the largest. This allows the stops to move away quickly but prevents them from moving in too close after a few unusually quiet days.

For quick bounce and reversal plays, you may not need (or want) the full range of the ATR. RightLine Chart users make a note that the default setting for the ATR indicator is 14 days, but you can change it by going to "Utilities" and "Parameters."

On any stock, there will be an assortment of choices that make reasonable stops. One size does not fit all. Among other factors, the stop to use will depend on your individual time frame and risk tolerance. With experience you can recognize the best levels and improve your chances of setting a successful stop.

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

The RightLine Report is an information service for investors and traders. It is not a solicitation nor a recommendation or offer to buy or sell securities. The information provided is obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. The publishers of The RightLine Report are not brokers or financial advisors, and are not acting in any way to influence the purchase or sale of any security. Stock picks, entry points and exit points should be considered an information resource to assist the trader in developing a trading plan and it is the sole responsibility of the reader to conduct his or her own due diligence before executing a trade. Trading securities should be considered speculative with a high degree of volatility and risk.

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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