Notes From The Editor

One of the terms you'll sometimes see in the Rightline Report is "converging." It's root is "converge," which means "to tend toward or approach an intersecting point." From a technical perspective, this is a very powerful word. It's revolves around the simple logic that two (or more) support levels are better than one.

Support and resistance comes in many flavors. When these come together, they create deep lines in the sand where Bulls and Bears tend to duke it out. Sometimes the battles can be epic and the outcome can dictate price action for days or weeks. With that in mind, let's take a closer look at these key levels.

Moving average: the 13, 22, 50, and 200-day moving averages are closely watched on Wall Street. Shorter-term traders will sometimes use slightly smaller numbers for MA calculations.

Horizontal: These are formed when price action rebounds or bumps its head into the same level more than once.

Historical: Levels dating back several years can come into play if a stock is trading at 52-week lows/highs.

Trendline: These are formed by connecting at least two relative lows or relative highs. Creating trendlines is one of the most basic and straightforward forms of technical analysis.

Psychological: Also sometimes referred to as "round-number" support/resistance, these are numbers like 2500, 10000, 50, and 100.

The most common convergence occurs when two moving averages are crossing paths. This doesn't necessarily mean that one MA is rising while the other is falling; often one will simply be rising or falling at a more rapid pace. For that brief moment when the two MAs touch, they can create a powerful wall that stops price action in its tracks. Sometimes three moving averages will converge, creating an even stronger price wall.

Note that we've coined the term "Moving Average Zone" when referring to any region on a chart where Moving Averages have converged into the same area. This term applies even when MAs haven't necessarily crossed each other but are in close proximity. The combined forces of different MAs within a narrow price range can be very powerful obstacle. This is especially true when it occurs on a major index like the Dow or S&P 500.

Moving average and horizontal support/resistance is another powerful convergence. Imagine, for example, that XYZ is trading at 30.25, and has already rebounded three times from 30.00. The 50 DMA is rising and currently at 29.94. With the underlying moving average reinforcing horizontal support at 30.00, you'd expect Bulls to vigorously defend that level. A solid rebound could offer a buying opportunity, while a breakdown would give traders a short signal.

Every type of support/resistance can be represented as a line on a chart. The more lines you draw in, the more likely it is that you'll spot converging levels. As an interesting experiment, trying "back-testing" some of your favorite stocks or one of the major indexes. Chances are, you'll see just how often convergences make a large impact on price movement.

Here's to profits,

Kent Barton
Senior Analyst

Quick List

    
Stock     02/03     02/03      Buy      Short   Trailing Stops     Gain 
Symbol    Price      +/-      Entry     Entry   Initial/Tighten   Amount 
------  --------  --------  --------  --------  ---------------  --------

MSB       21.75      0.90     22.24                  2.51/1.26       1.5
PBT       23.50      0.50     24.18     22.48         1.7/0.85       3.1
RCUS      20.51     -0.65     21.55     19.71        1.84/0.92       2.6
SBLK      22.18      0.05     22.68                  1.68/0.84      1.42
WLDN      21.12     -0.33        22     20.43        1.57/0.79      1.62

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

The major US stock indices were lower on Friday following the release of the January labor report and some anemic earnings results from large tech companies. Nonfarm payroll additions topped estimates, the unemployment rate declined, and domestic services sector activity shifted into expansion territory. The tight job market data along with persistent inflation have been factors in the Federal Open market Committee's (FOMC) agressive rate hike campaign. In equities, Apple (AAPL $155) fell short of estimates and reported its first quarterly revenues decline since 2019. Amazon (AMZN $107) and Google owner Alphabet (GOOGL $106) also announced disappointing quarterly results, while Qualcomm (QCOM $137) beat earnings per share (EPS) estimates by one cent, but missed on the revenue side. Treasury yields and the USD/dollar closed higher, gold and oil ended the session lower.

                      Friday                 On The Week      
                  --------------------   --------------------
Dow                 33,926.01  -127.93       -52.07    -0.15%
Nasdaq              12,006.95  -193.86      +385.24     3.31%
S&P 500              4,136.48   -43.28       +65.92     1.62%

NYSE Volume                      4.72B                       
NYSE Advancers                     837                       
NYSE Decliners                   2,248                       

Nasdaq Volume                    5.98B                       
Nasdaq Advancers                 1,715                       
Nasdaq Decliners                 2,867                       

                                 New Highs/Lows

                   01/27  01/30  01/31  02/01  02/02  02/03
                 --------------------------------------------
NYSE New Highs       115     66    104    177    203    121
NYSE New Lows          6      8      4      8      5      4
Nasdaq New Highs     127     89    138    190    199    142
Nasdaq New Lows       40     20     31     34     27     24
   

TRADER'S TIP: "The Market Trend: A Friend That's Too Big To Push Around"

"The manipulation of the primary trend is not possible. When large amounts of money are at stake, the temptation to manipulate is bound to be present. Speculators, specialists or anyone else involved in the markets could manipulate the prices, but it is not possible to manipulate the primary trend. Intraday, day-to-day and possibly even secondary movements could be prone to manipulation. These short movements, from a few hours to a few weeks, could be subject to manipulation by large institutions, speculators, breaking news or rumors. Individual shares could be manipulated, but manipulations usually end the same way: the security continues the primary trend. But it would be virtually impossible to manipulate the market as a whole. The market is simply too big for this to occur."

~ William Hamilton, the Dow theory

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 - 4136.48 February 3, 2023

52-Week High: 4637.30
52-Week Low: 3491.58
Daily Trend: UP
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 4475.60
Resistance 2: 4295.71
Resistance 1: 4216.09
Pivot: 4115.82
Support 1: 4036.20
Support 2: 3935.93
Support 3: 3756.04

NASDAQ Composite - 12006.95 February 3, 2023

52-Week High: 14646.90
52-Week Low: 10088.83
Daily Trend: UP
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 13650.36
Resistance 2: 12769.35
Resistance 1: 12388.15
Pivot: 11888.34
Support 1: 11507.14
Support 2: 11007.33
Support 3: 10126.32
        
Dow Industrials - 33926.01 February 3, 2023

52-Week High: 35824.28
52-Week Low: 28660.94
Daily Trend: UP
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 35453.93
Resistance 2: 34700.65
Resistance 1: 34313.33
Pivot: 33947.37
Support 1: 33560.05
Support 2: 33194.09
Support 3: 32440.81
 

Market Calendar

ECONOMIC REPORTS AND EVENTS (all times are Eastern):    

Monday, February 06, 2023:
06-Feb          None scheduled

Tuesday, February 07, 2023:
07-Feb  8:30 am   International trade deficit
07-Feb  11 am   NY Fed 1-year inflation expectations
07-Feb  11 am   NY Fed 5-year inflation expectations
07-Feb   3 pm   Consumer credit

Wednesday, February 08, 2023:
08-Feb  10 am   Wholesale inventories (revision)

Thursday, February 09, 2023:
09-Feb  8:30 am   Initial jobless claims
09-Feb  8:30 am   Continuing jobless claims

Friday, February 10, 2023:
10-Feb  10 am   UMich consumer sentiment index (early)
10-Feb  10 am   UMich 1-year inflation expectations (early)
10-Feb  10 am   UMich 5-year inflation expectations (early)
10-Feb   2 pm   Federal budget balance


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

TRADER'S TIP: "Slippage"

"Price slippage" is the difference in the price of the stock that appears on the ticker at the time you place a trade, and the price at which your order is actually filled. "Transaction slippage" is the difference between estimated and actual transaction costs. To control slippage, always trade liquid stocks, avoid low volume issues, and use limit orders whenever possible.

Stocks Covered in This Issue

BASIC MATERIALS SECTOR

Mesabi Trust (MSB: Basic Materials/Steel) - BULLISH BOUNCE. Entering a position in the early stages of a bounce is great way to get on board an up-trending stock. The "Bullish Bounce" setup identifies probable candidates by evaluating the trading action that takes place near support levels. MSB's behavior on Friday could very well be a sign that a new bounce is underway. Place a BUY trigger at 22.24. In the event your trigger is met, also place a 2.51 trailing stop which can be trimmed down to 1.26 when you have a 1.5 profit. MSB closed Friday at 21.75. Earnings Report Date: Apr 25, 2023. Beta: 0.91. Market-Cap: 285.36M. Optionable.

ENERGY SECTOR

Permian Basin Royalty Trust (PBT: Energy/Oil & Gas Midstream) - SQUEEZE PLAY. Friday's narrow price range has created a potentially profitable setup in PBT, 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 24.18 and a SELL short entry at 22.48. Let PBT's price action determine your long or short entry. Once the order is filled, place a 1.7 trailing stop, and tighten it to 0.85 upon getting a 3.1 gain. PBT closed Friday at 23.50. Earnings Report Date: N/A. Beta: 0.94. Market-Cap: 1.095B. Optionable.

HEALTHCARE SECTOR

Arcus Biosciences, Inc. (RCUS: Healthcare/Biotechnology) - SQUEEZE PLAY. RCUS 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 21.55 and a SELL short entry at 19.71. Once your trade is filled, enter a 1.84 trailing stop. Tighten it to 0.92 after a 2.6 gain. RCUS closed on Friday at 20.51. Earnings Report Date: Feb 21, 2023. Beta: 0.86. Market-Cap: 1.485B. Optionable.

INDUSTRIALS SECTOR

Star Bulk Carriers Corp. (SBLK: Industrials/Marine Shipping) - BULLISH BOUNCE. Another bullish bouncer, SBLK appears ready to resume trading in an uptrend after recent selling forced the stock lower for several days. Friday's positive price action near Moving Average support says it's time to BUY shares if SBLK reaches our entry trigger set at 22.68. Also place a 1.68 trailing stop which can be narrowed to 0.84 when you reach a 1.42 profit. SBLK closed Friday at 22.18. Earnings Report Date: Feb 16, 2023. Beta: 1.04. Market-Cap: 2.278B. Optionable.

Willdan Group, Inc. (WLDN: Industrials/Engineering & Construction) - SQUEEZE PLAY. Traders are feeling the pressure as WLDN'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 22 and a SELL short entry at 20.43. WLDN's price movement will decide which entry is filled. As soon as you're in the trade, enter a 1.57 trailing stop. Tighten it to 0.79 after you get a 1.62 gain. WLDN closed Friday at 21.12. Earnings Report Date: Mar 08, 2023. Beta: 1.26. Market-Cap: 280.788M. 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

"Market Liquidity and Fund Flows"

You may remember from high school economics that business operates on the basic principle of "supply and demand." If there is a lot of demand for a limited amount of supply, prices will go higher, if there is more supply than demand, than prices will go lower. In the stock market, the principle works the same way. If there are more people who want to buy (demand) than there are people who want to sell (supply) prices will head higher, and visa versa.

Successfully forecasting short-term supply/demand for stocks can improve our odds as traders, but is it possible to do it? To find out, let's take a look at the providers of mutual fund flows and liquidity numbers to see how they can be helpful to traders.

- Who Provides the Mutual Fund Flow Data?

There are three premier companies that specialize in tracking flows in and out of mutual funds: Trim Tabs, AMG Data (Lipper), and the Investment Company Institute. Even though each company provides its own specific interpretation of the data, they all understand how important these flows are to the market.

At RightLine, we primarily use the TrimTabs reports. Trim Tabs Fund Flows report attempts to reliably forecast the Investment Company Institute's results by taking a sampling of approximately 850 statistically significant funds. The ICI numbers are more comprehensive, but are not always released as quickly as Trim Tabs.

- Trim Tabs

Trim Tabs is the only independent research service that publishes daily and weekly in-depth coverage of stock market liquidity going back to 1990. Charles Biderman, a former Barron's Financial Weekly editor, is the originator of the "Liquidity Theory". This view is based on the premise that the total market capitalization - price - is a function of liquidity, and has nothing to do with value.

The Mutual Fund Flows provided by TrimTabs is very popular with the media, but the Liquidity Report really gives a much broader picture of how money is shifting in and out of the market. TrimTabs considers liquidity a "coincident indicator" to stock prices. In other words, if we know where liquidity is heading, then we'll know where stock prices are heading at the same time.

The "Mutual Fund Flows" are the net amount of money either going in or out of mutual funds. Trim Tabs surveys over 850 equity and bond funds daily to calculate this figure. The flows are categorized as follows:

~ Total Equity Funds are made up of US Equity funds and International funds.

~ The US Equity funds include "Aggressive Growth", "Growth", and "Growth and Income" funds.

~ The Total Bond funds include Hybrid (stock and bond) funds, Government and GNMA bonds, Municipal Bonds, Corporate/Income/Global bond funds, and High Yield funds.

If US Equity funds show a significant inflow, the individual fund managers scramble to put the money to work in the market by buying stock. On the other hand, if there are major outflows from mutual funds, the fund managers liquidate stock to fulfill redemption requests from fund shareholders.

- Trim Tabs Liquidity Calculation

Liquidity is the difference between inflows and outflows of cash in the stock market over a given period of time. Trim Tabs calculates liquidity by adding US Equity Fund Inflows, two-thirds of newly announced cash takeovers, one-third of completed cash takeovers and subtracting new offerings.

Cash takeovers of publicly traded companies are considered a new inflow of cash into the market. On the other hand, new offerings (IPOs) are considered a drain on liquidity because they "use" money that would have been available for investing in the "previously-existing" stocks.

Liquidity tends to run higher during tax refund season and year-end bonus time, and lower near dates when people and companies have to pay their taxes.

The Trim Tabs website can be seen at https://www.trimtabs.com/.

- Investment Company Institute

The Investment Company Institute gets its data from ICI members, which represent 95 percent of the total investment company industry's assets.

The ICI web site shows similar information as the Trim Tabs Fund Flows, but as mentioned above, it covers a wider number of sources and isn't released as quickly.

ICI reports the assets of money market funds to the Federal Reserve Board each week and makes this data available to the public on a weekly basis. The Institute also reports monthly on three broad categories of funds. They are:

(1) Short-term funds which include tax-exempt money market funds;

(2) Taxable retail and institutional money market funds; and

(3) All funds other than money market funds - such as stock, income, corporate bond and municipal bond funds.

For more information you can visit ICI's website at: https://www.ici.org/new/index.html.

- AMG Data (Lipper)

AMG Data (Lipper) is another respected company that provides mutual fund flow information. They offer weekly aggregate and fund specific Money Flow reports on just about any sector. They maintain an archive of historical fund flow reports and year-end statistical data dating back to 1992 on all AMG sectors.

AMG collects and reports the numbers for all fund groups as soon as each company releases data. Vanguard, Fidelity, and American Funds report month-end numbers early the following month. Information on weekly reporting funds is for each week ended Wednesday. Monthly flows are calculated by combining weekly reported flows and monthly reported flows for each month.

AMG's "Cash Track" describes the rate at which money is coming into or going out of a sector. Most funds report weekly, and some report monthly, so AMG uses a 4-week moving average across the entire set of funds, even those that report less often. Weekly reporting funds include 93% of the share classes, which represent 75% of the total fund assets.

The AMG Data (Lipper) Services website is at https://www.lipperusfundflows.com.

Bottom Line: In conclusion, market liquidity and fund flow reports have historically been a timely indicator of investor sentiment and current demand. While liquidity and fund flows aren't something you would necessarily consider before each trade, this information can give you valuable insight into the market's current supply and demand situation.

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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