Notes From The Editor

Success in the market is all about timing. Pick the right entry and exit points, and you've scored a profitable trade.

While this point is obvious to anyone who's even dabbled in stocks, it's easy to overlook an underlying factor that can increase the odds of having good timing: the natural rhythm of the market.

Recently our discussion centered on some elements of trading in the morning. There are certain tendencies that tend to repeat themselves from day to day, giving some order and predictability to a seemingly chaotic market.

The same holds true of afternoon trading, which begins with the "lunchtime lull." As the major institutional traders in New York take lunch at 12:00-2:00 EST, the broader market will typically see a volume pullback and a decline in volatility.

For us retail traders, this offers an excellent chance to take stock of what's happened so far (no pun intended). Make note of which potential set-ups have fallen by the wayside, and which have emerged as the strongest candidates for the second half of trading.

Occasionally the lunchtime lull will extend into the end of the session, producing a non-eventful afternoon. This is often the case on Fridays before long weekends or holidays. Typically, however, volatility will return during the final two hours. Oftentimes the action will be even more intense than the morning session.

For traders holding active positions, the most important task is to make a note of which companies have upcoming earnings announcements. Tech companies typically report after the bell, while others will report the following morning. Holding a company's stock over its quarterly report can be a risky proposition. Use the final two hours to find an optimal exit point, being sure to close out the entire position before the closing bell sounds.

End-of-day volatility can be especially high on the last day of the quarter. Mutual funds making adjustments to their portfolios often wait until the last minute to buy or sell. The third Friday of every month, when stock options expire, is another session that tends to produce increased afternoon volatility.

The last two hours can offer up plenty of promising set-ups. But just as trading during the day's first 15-30 minutes can be a tricky proposition, the session's homestretch should also be left to very aggressive traders. Use that final half hour to manage any active position, to start game-planning for the next day, or to simply relax!

Here's to Profits,

Kent Barton
Senior Analyst

Quick List

    
Stock     02/04     02/04      Buy      Short   Trailing Stops     Gain 
Symbol    Price      +/-      Entry     Entry   Initial/Tighten   Amount 
------  --------  --------  --------  --------  ---------------  --------

AMCX      40.12     -0.39     41.45                  3.86/1.93       4.3
OZON      20.26      0.54     20.86     19.33        1.53/0.77      3.04
IRTC     124.35      2.61    128.74                 13.35/6.68     19.56
DXPE      28.51     -0.13      29.2     27.59        1.61/0.81      1.38
RYI       20.74      0.05     21.29     19.65        1.64/0.82      2.08

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 averages were mixed on Friday as the Dow Jones Industrial Averaged moved slightly lower, while the S&P 500 Index and the Nasdaq Composite both rallied. Economic news included a strong nonfarm payroll report for January that showed job growth was well above estimates, yet the unemployment rate was unexpectedly higher. In equities, Amazon (AMZN $3,153) and Pinterest (PINS $27) topped quarterly profit estimates, Ford Motor Company (F $18) fell short of expectations. The USD/dollar, gold and oil prices were higher, treasuries were lower, lifting yields.

                      Friday                 On The Week      
                  --------------------   --------------------
Dow                 35,089.74   -21.42      +364.27     1.05%
Nasdaq              14,098.01   219.19      +327.44     2.38%
S&P 500              4,500.53    23.09       +68.68     1.55%

NYSE Volume                      4.68B                       
NYSE Advancers                   1,503                       
NYSE Decliners                   1,796                       

Nasdaq Volume                    4.11B                       
Nasdaq Advancers                 2,938                       
Nasdaq Decliners                 1,654                       

                                 New Highs/Lows

                   01/28  01/31  02/01  02/02  02/03  02/04
                 --------------------------------------------
NYSE New Highs        10     26     63     76     56     67
NYSE New Lows        542    118     48     55    150    265
Nasdaq New Highs      20     34     57     56     38     45
Nasdaq New Lows    1,152    212    123    114    237    347
   

TRADER'S TIP: "Rallies Need Rest Too . . ."

For a rally to continue ahead in a healthy fashion requires some periods of rest. If a rally doesn't take periodic breaks, the inevitable exhaustion will result in a price collapse. Sustainable rallies proceed by taking two steps forward and one step back, pacing themselves so they don't burn out from climbing a sheer vertical ascent.

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 - 4500.53 February 4, 2022

52-Week High: 4818.62
52-Week Low: 3723.34
Daily Trend: UP
Weekly trend: DOWN
Weekly Pivot Levels
Resistance 3: 4865.86
Resistance 2: 4684.57
Resistance 1: 4592.55
Pivot: 4503.28
Support 1: 4411.26
Support 2: 4321.99
Support 3: 4140.70

NASDAQ Composite - 14098.01 February 4, 2022

52-Week High: 16212.23
52-Week Low: 12397.05
Daily Trend: UP
Weekly trend: DOWN
Weekly Pivot Levels
Resistance 3: 15597.73
Resistance 2: 14860.62
Resistance 1: 14479.31
Pivot: 14123.51
Support 1: 13742.20
Support 2: 13386.40
Support 3: 12649.29
        
Dow Industrials - 35089.74 February 4, 2022

52-Week High: 36952.65
52-Week Low: 30547.53
Daily Trend: UP
Weekly trend: DOWN
Weekly Pivot Levels
Resistance 3: 37454.54
Resistance 2: 36271.44
Resistance 1: 35680.59
Pivot: 35088.34
Support 1: 34497.49
Support 2: 33905.24
Support 3: 32722.14
 

Market Calendar

ECONOMIC REPORTS AND EVENTS (all times are Eastern):    

Monday, February 07, 2022:
07-Feb   3 pm   Consumer credit

Tuesday, February 08, 2022:
08-Feb   6 am   NFIB small-business index
08-Feb  8:30 am   International trade
08-Feb  11 am   Real household debt (year-over-year)

Wednesday, February 09, 2022:
09-Feb  10 am   Wholesale inventories (revision)

Thursday, February 10, 2022:
10-Feb  8:30 am   Initial jobless claims
10-Feb  8:30 am   Continuing jobless claims
10-Feb  8:30 am   Consumer price index (month-to-month)
10-Feb  8:30 am   Core CPI (month-to-month)
10-Feb  8:30 am   Consumer price index (year-to-year)
10-Feb  8:30 am   Core CPI (year-to-year)
10-Feb   2 pm   Federal budget

Friday, February 11, 2022:
11-Feb  10 am   UMich consumer sentiment index (preliminary)
11-Feb  10 am   UMich 5-year inflation expectations (preliminary)


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

TRADER'S TIP: "Using The Market Map"

While Charting and Technical Analysis gives us a map of the market by revealing the price levels where trading decisions need to be made, it doesn't make those decisions for us. It's our job as traders to begin the journey by entering positions and taking the right exits along the way!

Stocks Covered in This Issue

COMMUNICATION SERVICES SECTOR

AMC Networks Inc. (AMCX: Communication Services/Broadcasting) - 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. AMCX's reaction to support on Friday created a Bullish Bounce setup with a BUY entry trigger at 41.45. Use a 3.86 trailing stop, which should work well with AMCX's typical daily range. Tighten it to 1.93 on a 4.3 profit. AMCX closed at 40.12 on Friday. Earnings Report Date: Feb 16, 2022. Beta: 0.90. Market-Cap: 1.724B. Optionable.

CONSUMER CYCLICAL SECTOR

Ozon Holdings PLC (OZON: Consumer Cyclical/Internet Retail) - SQUEEZE PLAY. When a stock's daily price range contracts to an unusually low point, you can safely assume that in most cases a breakout from that range will result in a nice price move. To capture a portion of this potential movement we have set both a long and a short entry into OZON. A move to the upside will trigger our BUY entry at 20.86, while a drop to 19.33 will trigger our SELL short entry. Follow your position with a 1.53 trailing stop. Tighten the stop to 0.77 once you have a 3.04 gain. OZON closed Friday at 20.26. Earnings Report Date: N/A. Beta: N/A. Market-Cap: 4.847B. Optionable.

HEALTHCARE SECTOR

iRhythm Technologies, Inc. (IRTC: Healthcare/Medical Devices) - 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 124.35, IRTC is on our radar for a BUY entry at 128.74. If you purchase shares of IRTC, be sure to also place a trailing stop of 13.35. Snug it up to 6.68 on a 19.56 gain. Earnings Report Date: Feb 23, 2022. Beta: 1.14. Market-Cap: 3.659B. Optionable.

INDUSTRIALS SECTOR

DXP Enterprises, Inc. (DXPE: Industrials/Industrial Distribution) - SQUEEZE PLAY. DXPE is caught in a dilemma. The stock's compressed price range on Friday has resulted in a condition comparable to a wound up rubber band. We anticipate that this undecided equity will take off soon, but with the direction still in question we'll let upcoming market action tell us whether to buy shares or sell short. DXPE is now at 28.51. We can capture price action either way by placing a BUY trigger at 29.2 and a SELL short trigger at 27.59. Once DXPE reveals its direction, enter your triggered order and disregard the other one. As soon as your position is in place, follow up with a trailing stop of 1.61. When you acquire a 1.38 profit, tighten the stop to 0.81. Earnings Report Date: Mar 07, 2022. Beta: 2.26. Market-Cap: 534.58M. Optionable.

Ryerson Holding Corporation (RYI: Industrials/Metal Fabrication) - SQUEEZE PLAY. One interesting trait of price volatility is that it cycles back and forth through periods of expansion and contraction. Stocks that have recently seen their daily price range shift from an average or wide range to an extremely contracted state are ideal candidates for expansive price moves. In many cases the next move is relatively fast and covers a sizable amount of territory. To take advantage of these trades we use both a BUY and a SELL entry. This allows us to enter in whichever direction the breakout takes. In RYI's case we will enter a BUY should it reach the 21.29 level, or a SELL short trade if it drops to 19.65. As usual a trailing stop is essential, 1.64 which should be tightened to 0.82 on a 2.08 gain. RYI closed Friday at 20.74. Earnings Report Date: Feb 23, 2022. Beta: 1.71. Market-Cap: 796.296M. 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  
---------------- -------     --------    -------     ------  -------   
ePlus             PLUS      11/9/2021   12/14/2021  2-for-1   Yes
NAPCO Security    NSSC      12/8/2021   1/5/2022    2-for-1   Yes
AeroCentury Corp  ACY       12/17/2021  1/10/2022   5-for-1   No 
Merchants Bancorp MBIN      11/17/2021  1/18/2022   2-for-1   No
SMART Global Hold SGH        1/4/2022   2/2/2022    2-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

"How To Trade Channeling or Range Bound Stocks"

(Editor's Note: Though the markets may change over time, some aspects of trading will always stay the same. Such is the nature of human behavior, especially when money is involved. Senior Analyst T.C. Salmon wrote the following Trader's Corner quite a few years ago, and it's still just as relevant to trading stocks today as it was then. Enjoy!)

Often a stock will enter a period when it seems to go nowhere. One day's gains are offset by a dip the following session or two, and so on and on. This Bull and Bear tussle can be very profitable if one takes the time to identify the trend - or in these cases, the lack of trend - and trade the boundaries of support and resistance.

There are several names for this behavior. Call it what you may: "channeling", "range bound" or "consolidation"; its all the same thing. Buyers seem to come out of the woodwork as shares approach the bottom of their range and sellers are waiting at the top.

No pattern lasts forever, so it is important to recognize when the stock you are watching breaks out of its pattern in one direction or the other. This is where risk management through the use of trailing stops comes into play.

There are several key factors which need to be addressed if you decide to trade a channeling stock.

First find a company which has easily identifiable support and resistance levels. Many times a stock will "bounce" back and forth between key DMAs such as the 22 and 50 DMAs. It is important to note the distance between the DMAs, not so much by dollars and cents, but rather by percentage.

Give preference to the stocks with a 5-10% difference between the two extremes. Since most people prefer the bullish side, also give preference to plays where the levels of support or resistance are either running "flat" (vertical) or on a slight incline. This can be easily seen when using DMAs - Daily Moving Averages - or by drawing trend-lines through recent highs and lows on the daily chart.

In addition, pay attention to the stocks' Beta. Stocks with a Beta above 1 will be more active than the S&P 500, those under 1 less volatile. A Beta of 1.20 means that a company's stock price will be 20% more volatile than the S&P and a Beta of 0.80, 20% less volatile. Those not able to monitor their investments closely should stay with lower Beta companies.

Compare a stock's recent volume with its norm. Average volume can be easily found if you use RightLine Charts, or you can pull up a company's chart on Yahoo Finance. If a stock moves out of its recent range on markedly higher volume, chances are that it will continue the trend at least into the next session.

Keep an eye on the overall trend of the markets. Also monitor the news, and be aware of significant upcoming events on each trade that you are in. Earnings report dates are very important.

Now let's take a look at an example:

TRST began to become range bound on December 23rd. This happened to be a stock that I was long in and was becoming frustrated with. As I began the process of evaluating whether or not I wanted to be in the stock or move on to something else, I recognized what was occurring on the charts.



If you draw a straight line through the December 29th high and another line through the January 6th low, the channel is clear. Buying near the low of the channel and selling near the top would have yielded one or two successful trades per week, on a consistently profitable basis.

TRST broke out of its channel to the upside on January 20th, then pulled back into it the following session. Notice how its floor or support level seems to be moving up. From late December to January 13th, support was coming from near 13.20-13.23, it then moved up to the 50 DMA (13.40) and now it appears to be moving into the 22 DMA's (13.53) neighborhood.

At the same time intra-day highs have been declining. This has given TRST smaller intra-day spreads in price and thus less room for profits in channel trading. That said, the "coiling" or "squeezing" of the stock's price, on lower volume and firming and rising support looks bullish to me. This should make TRST a good candidate for a long position, but that's another column.

If you are interested in channel trading, pick a stable of companies to monitor on a daily basis. Make sure they meet your personal risk tolerance preference and price comfort level.

Watch your stocks for "pauses" to develop with clear lines of support and resistance. Make sure on your purchases that you immediately set trailing stops just below support. The amount of the stop should be based on the price of the stock and its intra-day volatility range.

Plan an exit strategy before you get into a trade. Remember - it is extremely rare to ever buy at the exact low and sell at the high on these stocks. Good luck to you, and remember to always "plan your trade and trade your plan!"

TC Salmon
Senior Analyst

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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