Notes From The Editor

Whenever the market rolls over into a "dip", most investors are inclined to focus on why it happened. Though I'm always curious about the reasons behind a pullback, as a trader I'm more interested in the potential profits to be gained from the price movement. This means viewing any move as a pathway to another profitable trade setup.

Realizing the power of momentum associated with trend, I prefer to enter trades in the same direction as the primary trend for the time frame I've chosen to trade. And being somewhat risk averse, I also prefer to anticipate price levels where positions can be entered with very low risk. Because of this preference I lean toward trades that are likely to take place near support or resistance levels.

Bounces and reversals rank high on the RightLine list of set-ups to trade. My two personal favorites in this group are the "Bullish Bounce" and the "Bearish U-Turn." Both of these trades provide excellent profit opportunities, yet they don't require you to be directionally biased or to act on "blind faith" - the belief that the market is "definitely" going to move favorably.

The "Bullish Bounce"

This Set-up first looks to determine the current trend, and as the name implies, the trend has to be bullish. Once the strength of the trend is confirmed, we will watch for a normal pullback to take place. There are certain criteria that qualify the pullback as "normal." Included is the distance the stock drops in proportion to price, and the length of time it takes to complete the decline.

The final and most important requirement for a Bullish Bounce set-up is determined by how price reacts when it comes in contact with a support level, such as a specific moving average. The preferred reaction occurs whenever price dips to the support level during intra-day trading, then reverses and moves up a certain percentage of the day's high-to-low range.

Once the Bullish Bounce Setup is in place, we want to see a confirming sign that the previous upward trend is about to resume. This is usually a price move that takes out a short-term technical resistance level, such as the high of the Set-up day, and should normally occur within one or two days after the Set-up day. That move is our signal to immediately enter the trade. Once a position is bought, we always place an Initial Stop for protection, and then follow up with a Trailing Stop as the trade moves favorably.

The "Bearish U-Turn"

Similar to the Bullish Bounce, this trade looks for a strong trend. However, instead of an upward, bullish trend, the Bearish Setup looks for a downward trend. Once the trend is confirmed, we wait for a normal rise to take prices back up to a selected moving average, which serves as resistance. Just as in the Bullish bounce, the criteria for "normal rise" includes the distance the stock rises in proportion to price, and the length of time it takes to complete the move up to the chosen resistance.

The most important aspect of a Bearish U-Turn set-up is determined by how price reacts when it comes in contact with the resistance level, the specific moving average. The preferred reaction takes place when price rises to the resistance level during intra-day trading, then reverses and moves down a certain percentage of the day's high-to-low range.

Once the "Bearish U-Turn" Setup is in place, we watch for a confirming sign that the previous downward trend is about to resume. This is usually a price move that takes out a short-term technical support level, such as the low of the Set-up day. This move will normally occur within a day or two after the Set-up day. The move is our signal to immediately place an order to sell short. Once a position is entered, we always place an Initial Stop for protection, and then follow up with a Trailing Stop as the trade moves favorably.

Another positive aspect to both of these trades is the tendency for price to gain momentum as it moves away from the point of entry. They often become positive very quickly, allowing the initial stop to be moved to the break-even level. At this moment the position essentially becomes a "free" trade with no risk of loss - as long as the stop is only moved in the direction of the profit.

Bottom line: These types of reversal trades provide excellent opportunities when filtered through the RightLine Risk Control Calculator. Be sure to watch for Bullish Bounces and Bearish U-Turns in the RightLine Report. They're certainly among my favorite setups, and I suspect you will like them too.

Enjoy the weekend!

~Thomas Sutton, Editor

Quick List

    
Stock     01/19     01/19      Buy      Short   Trailing Stops     Gain 
Symbol    Price      +/-      Entry     Entry   Initial/Tighten   Amount 
------  --------  --------  --------  --------  ---------------  --------

JHX       37.72      0.54     38.39                  2.44/1.22      1.86
LLY      628.58      5.23    637.86                36.68/18.34     24.14
AVTE      20.27      0.72     20.62     18.76        1.86/0.93      3.86
RAPT      23.88      0.36     24.32     22.48        1.84/0.92      2.48
ACMR      20.46      0.55     20.81     19.12        1.69/0.85      1.66

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 S&P achieved a new high on Friday, with US equity futures extending Thursday's gains overnight. With no significant earnings setbacks and lacking impactful economic data, coupled with the implied probability of a March Fed rate cut hovering just above 50%, investors showed comfort with stocks at or near new all-time highs.

Early market breadth favored advancers by almost 3-to-2, although small caps continued to underperform, with IWM down 0.65% compared to modest gains in the S&P and Nasdaq. Technology, Communications, and Financials led the sectors early on, with Real Estate and Energy also in positive territory. Utilities and Consumer Staples were among the early laggards.

The only mild setback, albeit not leaning toward a hawkish stance, came from comments by Chicago Fed President Goolsbee, emphasizing the need for clearer evidence that inflation is on track to the target rate before considering a change in the policy rate.

The S&P 500 had been without a new all-time high for 512 days, marking the sixth-longest streak since the inception of the five-day trading week in 1952. Friday's record high put the current bull market at 464 days, matching the median bull run but only half as long as the average bull of 991 days.

By the closing bell, market breadth had expanded to nearly 2-to-1 in favor of advancers, with equities maintaining near the day's highs. Technology (+2.15%), Financials (+1.62%), and Communications (+1.33%) led the gainers, while only Utilities (-0.01%) and Consumer Discretionary (-0.03%) remained slightly in the red. IWM and RUT had rebounded to gains of about 1% in the small-cap segment but still underperformed SPY and QQQ. From a style perspective, both growth and value saw solid gains, with growth outperforming. Russell 1000 Growth was up by +1.33% compared to its Value counterpart at +0.89%.

                      Friday                 On The Week      
                  --------------------   --------------------
Dow                 37,863.80   395.19      +270.82     0.72%
Nasdaq              15,310.97   255.32      +338.21     2.26%
S&P 500              4,839.81    58.87       +55.98     1.17%

NYSE Volume                       4.3B                       
NYSE Advancers                   1,964                       
NYSE Decliners                     856                       

Nasdaq Volume                    5.62B                       
Nasdaq Advancers                 2,641                       
Nasdaq Decliners                 1,623                       

                                 New Highs/Lows

                   01/12  01/15  01/16  01/17  01/18  01/19
                 --------------------------------------------
NYSE New Highs       107      0     56     46     68    118
NYSE New Lows         23      0     68     86     52     48
Nasdaq New Highs     134      0     87     54     88    197
Nasdaq New Lows       86      0    207    239    203    223
   

TRADER'S TIP: "Bull or Bear?"

Some traders will buy a stock and immediately become very bullish, while others will sell short and then become very bearish. Whether you are a bull or a bear, never let your holdings do your thinking for you. Always remain unbiased. Your only prejudice in the market should be against being wrong.

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 - 4,839.81 January 19, 2024

NASDAQ Composite - 15,310.97 January 19, 2024
        
Dow Industrials - 37,863.80 January 19, 2024
 

Market Calendar

ECONOMIC REPORTS AND EVENTS (all times are Eastern):    

MONDAY, JAN. 22					
10:00 am	U.S. leading economic indicators	

TUESDAY, JAN. 23					
None scheduled
				
WEDNESDAY, JAN. 24					
9:45 am	S&P flash U.S. services PMI	
9:45 am	S&P flash U.S. manufacturing PMI
	
THURSDAY, JAN. 25					
8:30 am	Q4 GDP (prelim)			
8:30 am	Initial jobless claims	
8:30 am	Durable-goods orders	
8:30 am	Durable-goods minus transportation	
8:30 am	Advanced U.S. trade balance in goods	
8:30 am	Advanced retail inventories	
8:30 am	Advanced wholesale inventories	
10:00 am	New home sales	

FRIDAY, JAN. 26					
8:30 am	Personal income	
8:30 am	Personal spending	
8:30 am	PCE index	
8:30 am	Core PCE index	
8:30 am	PCE (year-over-year)			
8:30 am	Core PCE (year-over-year)			
10:00 am	Pending home sales

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

TRADER'S TIP: "Practice, Practice, Practice"

The purpose of rehearsal is to create the habit of the objective.

~ William H. Macy

Stocks Covered in This Issue

BASIC MATERIALS SECTOR

James Hardie Industries plc (JHX: Basic Materials/Building Materials) - BULLISH BOUNCE. If you are looking for another bouncer with profits in mind, JHX fits the bill. Shares have been in retreat-mode lately, but now this stock is in the process of bouncing from support. Currently priced at 37.72, plan to buy shares at 38.39 and use a 2.44 trailing stop. Tighten the stop to 1.22 on a 1.86 gain. Earnings Report Date: N/A. Beta: 1.06. Market-Cap: 16.513B. Optionable.

HEALTHCARE SECTOR

Eli Lilly and Company (LLY: Healthcare/Drug Manufacturers - General) - NEW HIGH DIP. You know a stock is performing well when it sets a new 52-week high. Such is the case with LLY, which recently entered new-high territory before dipping lower the past few sessions. A rebound from Moving Average support on Friday indicates LLY may be ready to resume its upward climb. Now sitting at 628.58, a move to 637.86 will trigger a BUY entry. Place a 36.68 trailing stop after entering and tighten it to 18.34 once you've gained 24.14. Earnings Report Date: Feb 06, 2024. Beta: 0.31. Market-Cap: 596.715B. Optionable.

Aerovate Therapeutics, Inc. (AVTE: Healthcare/Biotechnology) - SQUEEZE PLAY. In certain stocks a tightly constricted price range is a sign that neither bulls nor bears are confident of winning in the near term. This often means that the side that gives up first causes a quick move in the opposite direction. In these fear dominated skirmishes, opposing traders always benefit from the retreat. In the Squeeze Play setup you can actually play both sides of the inevitable surge. AVTE traders reached this state of stand-off on Friday with the tightest range of the past seven days. You can take advantage of their efforts by placing a low risk BUY trigger at 20.62 and a SELL short trigger at 18.76. After one of the two orders is filled, cancel the un-triggered order and place a trailing stop at 1.86 which can be tightened to 0.93 on a 3.86 gain. AVTE closed Friday at 20.27. Earnings Report Date: Mar 27, 2024. Beta: 1.14. Market-Cap: 560.849M. Not Optionable.

RAPT Therapeutics, Inc. (RAPT: 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. RAPT 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 24.32 and a SELL short trigger at 22.48. When RAPT 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 1.84 trailing stop. After you've got a 2.48 profit, tighten the stop to 0.92. RAPT closed at 23.88 on Friday. Earnings Report Date: Mar 12, 2024. Beta: 0.66. Market-Cap: 821.381M. Optionable.

TECHNOLOGY SECTOR

ACM Research, Inc. (ACMR: Technology/Semiconductor Equipment & Materials) - SQUEEZE PLAY. ACMR traders on both sides of the fence are now locked in a head-to-head shootout. Friday's price range was the narrowest in over a week, as neither Bears or Bulls have been able to clearly gain the upper hand. This gives us an opportunity to catch the next directional move with little risk of loss. To do this we'll place both a long and a short trigger with a BUY at 20.81 and a SELL short trigger at 19.12. When one of the orders is filled, cancel the remaining order and enter a 1.69 trailing stop. When you've reached a 1.66 paper profit, tighten the stop to 0.85. ACMR closed at 20.46 on Friday. Earnings Report Date: Feb 22, 2024. Beta: 1.15. Market-Cap: 1.24B. 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

"WISHFUL THINKING: Thoughts from Dr. Alex Elder"

If you toss a frog into a pan of warm water and heat it very slowly you can boil it alive. When pain increases bit by bit, our natural tendency to do nothing and wait for an improvement. A sleepwalking trader keeps giving a losing trade more time, while it is slowly boiling him alive.

A sleepwalker hopes and dreams. He says, I know, my stock is going to come back, it always did before. Winners accept occasional losses, take them quickly and move on. Losers postpone taking losses, and some are foolish enough to look for a silver lining in a disaster. A broker calls his client and says, "I've got good news and bad news. What's the bad news? That stock you bought at 80 - it is down to 20. And what's the good news? The decline was on low volume."

An amateur enters a trade as if buying a lottery ticket. He waits for the wheel of fortune to decide whether he wins or loses. Professionals, on the other hand, have ironclad plans for getting out, either with a profit or a small loss. A key difference between professionals and amateurs is their planning for exits. Beginners dream of profits but are always ready to give a trade "more time to work out."

A sleepwalking trader buys a stock at 35 and puts in a stop at 32. The stock begins to sink, he says, 'I will give the market a little more room to breathe,' and moves his stop down to 30. This is a fatal mistake - he has breached his discipline, violated his own plan.

You may move your stops only one way - in the direction of the trade. Stops are like a ratchet on a sailboat, designed to take the slack out of your sails. If you start giving your trade "more room to breathe," that extra slack will swing and hurt you. Even if the market rewards you for breaking the rules on one trade, it will lay an even bigger trap for you on the next trade.

The best time to make decisions is before you enter a trade. Your money is not at risk, and you can weigh benefits and risks. Once you put on a trade, you begin to form an emotional attachment to it. The market will do its best to hypnotize you and lure you into making emotional decisions. Write down an exit plan and follow it!

Turning a losing trade into an "investment" is a disease of small private traders, but some institutional traders can catch it also. Disasters at banks and major financial firms have occurred when poorly supervised traders lost money in short-term trades and stuck them into long-term accounts, hoping that time will bail them out. If you are losing in the beginning, you'll lose in the end. Do not put off the hour of reckoning. The first loss is the best loss - this is the rule of those who trade with their eyes open.

A neighbor of mine had struggled with the markets for eight years before he grew into an internationally famous successful trader. Today many of our friends in New York like to reminisce about the days he clerked on one of the smaller exchanges in the city and struggled to make ends meet. An old trader said to me, 'I knew him then, and I thought he would succeed. He had the right combination of being very careful and having this optimism you need to get up in the morning and believe you're going to make money trading the markets.'

In order to succeed in trading you need both self-confidence and humility (also known as caution). If you have one but not the other, you're in a dangerous position. If you have self-confidence but no caution, you'll be arrogant, which is deadly for traders. If you have caution but no confidence, you won't be able to pull the trigger on your trades.

You need confidence to say - the market is going up, I believe it will continue to rally, I am going to get long and ride this trend. On the other hand, you need humility to accept the uncertainty of the markets - and to run fast when a trade goes against you.

It is a hallmark of emotional maturity to be aware of two conflicting feelings at the same time. When you feel a surge of confidence in your trading idea, it is hard to have the humility to think of the downside risk - but if you cannot think of the risk, you cannot handle it. When the market goes against you and hits your predetermined exit level, you have to humbly give a sell order, no matter how confident you feel about your analysis.

Being a trader is a journey of self-discovery. Trade long enough, and you will face all your feelings, including anxiety, greed, fear, and anger. But self-discovery is the byproduct, not the primary goal of trading. The main goal is to minimize losses and accumulate equity. Keep asking yourself - "What is my profit target in this trade" and "What will I do to protect my capital in this trade?"

A good trader accepts total responsibility for the outcome of every trade - even though he knows that others are trying to take his money. If other traders or even brokers take your money, you are still responsible. You have to keep improving your trading plans. You need to cultivate both self-confidence and humility.

EXITING TRADES

Whenever you plan a trade, three factors must be crystal-clear in your mind - where to get in, where to take profits, and where to bail out in case of an emergency. Daydreaming about profits will not make you rich. You must know at what point you will collect your winnings or else cut and run if the market turns against you.

Professional traders spend a lot of time and energy planning their exits from trades. Where to take profits, when to cut losses, how to maintain a good ratio between them in order to maximize gains and minimize losses - these and related questions are paramount in the pros' minds.

When people approach the markets, they go through a natural progression. Their first baby steps are stumbling but overconfident, while a pro is cautious but firm. Beginners keep looking for what to buy (they almost never sell short), like puppies that eat anything they find on the ground, including some very unhealthy stuff. The pros sniff and choose the best morsels. In trading, newbies are eagerly looking for markets to enter, without much thought about the exits. The pros are quite matter-of-factly about entries but very particular about exits. They have discovered the essential truth - you do not get paid for entering trades, you get paid for exiting them.

Planning for an exit must begin before you enter a trade. One of the first things we must do when looking at a new stock or a future, is measure the width of its channel. Let us see whether it is wide enough to be worth trading. We know that an "A" trader takes 30% or more out of a channel, while a "C" trader takes 10%. If we begin by accepting the possibility that we may have a C trade, then let us decide whether 10% of that channel is a worthwhile target. If a channel is 20 points wide, even a 10% gain will give us some money, but if the channel is only 5 points wide, then 10% will bring us peanuts, not worth the risk.

Exiting trades is more complex than entering them. It is simple to get in using a limit order to minimize slippage; either we are in or we aren't. Exits are much more challenging. We need to have a profit target, which will keep shifting as the trade goes on. We need to have a protective stop with a sensible formula for moving it as the trade moves in our favor. Sophisticated traders who swing large positions have strategies for canceling profit targets when they recognize especially powerful trends or taking only partial profits and carrying the rest of their position with a new exit strategy for runaway trends.

Exits sound complex because they are. As one multimillionaire said about trading, 'If this was easy, mermaids would be doing it.' Entering a trade can be as easy as buying a lottery ticket, but then the music starts and exits separate winners from losers.

**************

Dr. Elder is the author of several books including the classic "Trading For A Living." He also authored "Come Into My Trading Room: A Complete Guide To Trading" and his newest work "Sell and Sell Short."

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.

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