Notes From The Editor

The best traders are flexible. They know how to admit when they are wrong, get out of their losing positions quickly, and move ahead to the next trade. Though all traders aspire to be flexible, truth is many of us limit ourselves in ways we aren't even aware of.

For example, a large percentage of traders still don't use shorting as a way to increase profit opportunities. Short-sellers have gotten a lot of bad press over the years, causing many traders to falsely assume that shorting should be avoided. In the real world, declining markets are very similar to rising markets in at least one respect. Both types of markets present a trend that should be considered when making intelligent trade decisions. Of course that requires flexibility on our part.

The long term upside bias of the stock market has convinced many traders that shorting just isn't a smart thing to do. However, trading isn't the typical type of investing. Traders generally don't hold stocks long enough for long-term trends to impact their positions. Traders take advantage of shorter-term trends and price swings, while investors count on very long-term trends and economic cycles to produce profits.

Short-term market dynamics differ from long-term in an important way. While the market has historically trended higher in the past 100+ years, it hasn't moved in a straight line. Instead, prices have risen and fallen in a repeating cycle, a cycle that has trended higher over the long haul.

In some way all short-term traders take advantage of the inevitable declines. Most do this by waiting for the pullbacks to end before buying shares. Others watch for signs that the upward leg of the cycle is complete, and then enter short trades to profit from the fall.

Doing both of these allows us to significantly increase the number and quality of trading opportunities available. By keeping an open mind, we begin to understand the dynamics of short selling in relation to the constant rotation of up and down trends that occur in every time frame.

While the art of shorting does carry unique restrictions and risks, it certainly isn't the dangerous act it's often made out to be. Using effective short-selling techniques actually lowers overall risk by letting you make money in down trending markets. From personal experience, shorting is a powerful skill to be considered by anyone who is serious about trading stocks.

Stay flexible,

~ Thomas Sutton, Editor

NOTE: The US stock markets will be closed Monday, January 17, 2022 for the Martin Luther King Jr. Holiday.

Quick List

    
Stock     01/14     01/14      Buy      Short   Trailing Stops     Gain 
Symbol    Price      +/-      Entry     Entry   Initial/Tighten   Amount 
------  --------  --------  --------  --------  ---------------  --------

RICK      84.95      0.43     86.38                  5.95/2.98      6.82
BRBR      25.92      0.46     26.33     24.48        1.85/0.93      1.92
JXN       44.04      0.28     44.72                  3.43/1.72       3.4
EVH       25.36     -0.81     26.45     24.41        2.04/1.02      1.74
FROG      26.19     -0.15     27.05      24.8        2.25/1.13      2.64

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 stock averages were mixed on Friday as the S&P 500 Index and the Nasdaq Composite moved higher, while the Dow Jones Industrial Average drifted lower in heavy trading volume. The Financial sector led the decliners following the release of mixed earnings results from Wells Fargo & Company (WFC $58), JP Morgan Chase (JPM $158) and Citigroup (C $67). Weak economic data was headlined by a sharp decline in December retail sales, a large drop in consumer sentiment and a modest dip in industrial production. Treasury yields, oil prices and the USD/dollar were higher, gold edged lower.

                      Friday                 On The Week      
                  --------------------   --------------------
Dow                 35,911.81  -201.81      -319.85    -0.88%
Nasdaq              14,893.75    86.94       -42.15    -0.28%
S&P 500              4,662.85     3.82       -14.18     -0.3%

NYSE Volume                      4.35B                       
NYSE Advancers                   1,348                       
NYSE Decliners                   1,991                       

Nasdaq Volume                    4.31B                       
Nasdaq Advancers                 2,097                       
Nasdaq Decliners                 2,483                       

                                 New Highs/Lows

                   01/07  01/10  01/11  01/12  01/13  01/14
                 --------------------------------------------
NYSE New Highs       101     95     96    128    137    101
NYSE New Lows        105    205     57     64    103    199
Nasdaq New Highs     103     87     45     97    113     79
Nasdaq New Lows      338    740    172    169    431    683
   

TRADER'S TIP: "Closing Positions Before Earnings And Getting Back In"

Because price action immediately after earnings announcements often ends up surprising traders, we suggest closing positions before the company releases their earnings report. However, if a stock is moving in a solid trend - long or short - and earnings support that trend, you may want to jump back into the trade after the company reports earnings. This can be profitable at times, but don't chase the stock. If it has jumped more than 5% beyond your exit point, let it go.

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 - 4662.85 January 14, 2022

52-Week High: 4818.62
52-Week Low: 3694.12
Daily Trend: UP
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 4997.82
Resistance 2: 4831.23
Resistance 1: 4747.04
Pivot: 4664.64
Support 1: 4580.45
Support 2: 4498.05
Support 3: 4331.46

NASDAQ Composite - 14893.75 January 14, 2022

52-Week High: 16212.23
52-Week Low: 12397.05
Daily Trend: UP
Weekly trend: DOWN
Weekly Pivot Levels
Resistance 3: 16491.93
Resistance 2: 15703.13
Resistance 1: 15298.44
Pivot: 14914.33
Support 1: 14509.64
Support 2: 14125.53
Support 3: 13336.73
        
Dow Industrials - 35911.81 January 14, 2022

52-Week High: 36952.65
52-Week Low: 29856.30
Daily Trend: DOWN
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 37769.80
Resistance 2: 36895.83
Resistance 1: 36403.82
Pivot: 36021.86
Support 1: 35529.85
Support 2: 35147.89
Support 3: 34273.92
 

Market Calendar

ECONOMIC REPORTS AND EVENTS (all times are Eastern):    

Monday, January 17, 2022:
17-Jan  None scheduled. Martin Luther King Jr. Day - Market Closed

Tuesday, January 18, 2022:
18-Jan  8:30 am   Empire state manufacturing index
18-Jan  10 am   NAHB home builders index

Wednesday, January 19, 2022:
19-Jan  8:30 am   Building permits (SAAR)
19-Jan  8:30 am   Housing starts (SAAR)
19-Jan  8:30 am   Philadelphia Fed manufacturing survey

Thursday, January 20, 2022:
20-Jan  8:30 am   Initial jobless claims (regular state program)
20-Jan  8:30 am   Continuing jobless claims (regular state program)
20-Jan  10 am   Existing home sales (SAAR)

Friday, January 21, 2022:
21-Jan  10 am   Leading economic indicators


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

TRADER'S TIP: "Learn As You Earn"

Short term trading is a great teaching vehicle. Through repetition we quickly learn how to select the correct number of shares for each position, and how to control risk using stops. We also rapidly learn how to trade in harmony with the trend, and become adept at managing each trade on its own merits.

Stocks Covered in This Issue

CONSUMER CYCLICAL SECTOR

RCI Hospitality Holdings, Inc. (RICK: Consumer Cyclical/Restaurants) - 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. RICK's reaction to support on Friday created a Bullish Bounce setup with a BUY entry trigger at 86.38. Use a 5.95 trailing stop, which should work well with RICK's typical daily range. Tighten it to 2.98 on a 6.82 profit. RICK closed at 84.95 on Friday. Earnings Report Date: Feb 07, 2022. Beta: 1.99. Market-Cap: 807.017M. Optionable.

CONSUMER DEFENSIVE SECTOR

BellRing Brands, Inc. (BRBR: Consumer Defensive/Packaged Foods) - SQUEEZE PLAY. Trader indecision has put BRBR squarely in the center of a Bull versus Bear standoff. This tight spot should soon give way to a clear winner in the short-term, and we want to be in position for the move. To do that we've set a BUY entry at 26.33 and a SELL short entry at 24.48. Now it's up to BRBR to show us which entry will be filled. Once the trade is underway place a 1.85 trailing stop, which can be tightened to 0.93 after you achieve a 1.92 profit. BRBR closed on Friday at 25.92. Earnings Report Date: Feb 02, 2022. Beta: 0.95. Market-Cap: 1.01B. Optionable.

FINANCIAL SERVICES SECTOR

Jackson Financial Inc. (JXN: Financial Services/Asset Management) - 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 44.04, JXN is on our radar for a BUY entry at 44.72. If you purchase shares of JXN, be sure to also place a trailing stop of 3.43. Snug it up to 1.72 on a 3.4 gain. Earnings Report Date: Mar 03, 2022. Beta: N/A. Market-Cap: 4.16B. Optionable.

HEALTHCARE SECTOR

Evolent Health, Inc. (EVH: Healthcare/Health Information Services) - 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 EVH's case we will enter a BUY should it reach the 26.45 level, or a SELL short trade if it drops to 24.41. As usual a trailing stop is essential, 2.04 which should be tightened to 1.02 on a 1.74 gain. EVH closed Friday at 25.36. Earnings Report Date: Feb 23, 2022. Beta: 2.11. Market-Cap: 2.267B. Optionable.

TECHNOLOGY SECTOR

JFrog Ltd. (FROG: Technology/Software-Application) - SQUEEZE PLAY. The struggle between buyers and sellers has resulted in FROG's narrowest trading range of the past seven sessions. With neither group able to take complete control on Friday, the stock's short term destiny is up for grabs. You can capitalize on this unusually tight condition by placing both a BUY order at 27.05 and a SELL order at 24.8. Regardless of which order is triggered, cancel the other one and follow your entry with a 2.25 trailing stop. Tighten the stop to 1.13 once you have a 2.64 gain. FROG closed Friday at 26.19. Earnings Report Date: Feb 10, 2022. Beta: N/A. Market-Cap: 2.524B. 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 Important Is A High Percentage of Winners?"

I sometimes see advertisements for trading services that proudly proclaim an ultra-high percentage of winners. These ads remind me of my early trading days. Like most rookies, I thought that a high percentage of wins was necessary to be successful. A lot of water has flowed under the trading bridge since then. I've learned that things aren't always as they seem - especially in the stock market!

Here's an example of what I mean - pretend for a minute that we're at the local county fair. As we walk down the fairway there are two games of chance side by side. The guy at the first booth leans over the counter and says, "Give it a try - a dollar a play, four out of 10 winners every time!"

At the next booth the fellow behind the counter shouts, "Step right up - a buck a play, six out of 10 winners guaranteed." Assuming that we're there to have fun (and make a little money if we get lucky), which game should we play?

At first glance it looks simple. Both games cost the same per play, but one has a higher percentage of winners. Of course we would take the six-out-of-ten game over the four-out-of-ten-game. But what if we took a step closer and found that the lower odds game paid out $4 for each winner, but the second game paid only $2. How would that affect our choice?

Now lets do the math. The first game costs $10 for ten plays, with four winners at $4 each. That's 4 times $4, or $16 in winnings. Subtract the $10 to play and we're left with $6 profit. The second game costs the same to play, but we end up with six winners. That's 6 times the $2 payoff for each winner, or $12 total minus the $10 to play leaves us with $2.

It's clear in this case that the lower percentage game pays off the most because each winner is twice the amount as in game two. In other words, the same amount invested in a lower percentage game produced three times the profits because the payoff per winner is higher.

It's obvious in this example that the higher reward to risk ratio in the first game was a very important component in the profitability of the game. That exact same aspect is true in trading stocks. While our intuition may tell us that a trading method with a very high percentage of winners is always "better," logic indicates otherwise. Not only should we consider the percentage of winners when deciding which strategy to use, but we should also consider the reward to risk ratio.

All things being equal, a high percentage approach will produce higher profits. However, there is a severe penalty for pushing too hard toward a high percentage of wins. The unpredictable and relatively efficient nature of the stock market insures that traders who follow this approach will be forced into two very damaging situations - smaller profits and larger losses.

To maintain the high number of winners, traders are forced to limit the reward for each trade and take quick profits. Strategies that depend on small profits are capable of high winning percentages, yet to achieve this high win-to-loss ratio they also have to take on more risk per trade.

If they limit the amount of risk or loss per trade, the percentage of winners drops too. A study of different trading systems by Keener Capital Management show that higher winning percentages are characteristic of the worst performing strategies. By contrast, strategies with lower winning percentages were the most profitable.

In summary, a high percentage of wins don't necessarily mean more profit. Robust trading strategies require risk control tactics that include reasonable stop placement.

Instead of trying to maintain a very high win-to-loss ratio, traders will benefit more by focusing on trade management to arrive at a profitable balance between risk and reward. A simple yet extremely effective guideline is to:

- Limit losses to reasonable amounts

- Use trailing stops to lock in accumulating profits

- Let the winners grow!

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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