Notes From The Editor

Common Trading Mistakes...And How to Avoid Them (Part I)

One of the basic building blocks of successful trading is the stuff you don't do. While best practices such as stop-loss placement and effective risk management sharply improve your ability to grow your trading account, there are also several potential pitfalls to watch out for.

Over the coming weeks we'll take a closer look at several of these trading traps. Let's start by looking at three mistakes that are especially prevalent in the modern age of non-stop, on-demand information.

Mistake #1: Trading meme stocks that are hyped in online forums.

The promise can see be so alluring. A gang of excited Robinhood or Reddittraders pump up a stock, calling for a huge price move. Then, within hours the ticker actually starts to do what they said it would. You jump in as soon as you find out about it, only to have the position dramatically reverse course.

This "pump and dump" is a classic scheme that has continued unabated in the Information Age. However, you can easily avoid this trap by simply ignoring hype-filled forums. Also be weary of stocks that trade on very light volume; scheming traders find it much easier to push around low-volume equities.

Mistake #2: Falling in love with a "story."

The stock media loves to shape conventional wisdom. However, this doesn't always match what's really happening in the market. Imagine, for instance, that you turn on the TV and see a report on how stock prices will head lower over the next week. Your favorite mainstream Wall Street websites say the same thing.

Could those reports be right? Absolutely. But before you commit yourself to the story that's being written by the media, verify it with your own knowledge and tools. Do the technicals support the outlook for more weakness? Or are they deeply oversold and ready for a bounce? Trade based on what you see - not on what the media tells you.

Mistake #3: Overloading your screen with too many indicators.

Another classic mistake: analysis paralysis! Technical indicators are a wonderful thing, and a well-groomed daily chart can provide an excellent roadmap to likely price movements. The problem occurs when the chart starts to look more like an overgrown garden, with moving averages, indicators, and numbers creating confusion and contradictions.

The remedy for this mistake is to keep it simple and focused. Use only the technical indicators that you feel most comfortable with. If you're thinking about adding a new indicator to your line-up, give it a trial period first to see if it fits into your current strategy.

Additionally, remember that basic analyses of price action - moving averages and trendlines, for example - tend to be more effective than more obscure indicators. The reason is simple: more market participants watch the price action, and act accordingly.

Here's to profits,

Kent Barton
Senior Analyst

Quick List

    
Stock     01/20     01/20      Buy      Short   Trailing Stops     Gain 
Symbol    Price      +/-      Entry     Entry   Initial/Tighten   Amount 
------  --------  --------  --------  --------  ---------------  --------

GOOS      21.14      0.61     21.42                  1.96/0.98      1.44
QFIN      22.48      0.87     22.99                  1.89/0.95      1.92
VERV      21.59      0.77     22.37                  2.35/1.18      2.54
RLAY      20.58      0.37     21.05      19.4        1.65/0.83      1.78
ARNC      23.38      0.37      23.9                  1.75/0.88      1.56

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

Stocks were higher on Friday, though not quite high enough to chalk up gains for the entire week. Economic news was on the light side, with the release of one report showing eleven consecutive months of decline in existing home sales. Earnings announcements highlighted equity news, as Netflix (NFLX $343) missed profit estimates yet handily topped forecasts for subscribers, while paints and coatings maker PPG Industries (PPG $131) beat earnings expectations. In other stock related news, Google owner Alphabet announced it will cut its workforce by 12,000 employees. Oil prices, gold and treasury yields were higher, the USD/dollar closed slightly lower.

                      Thursday               On The Week      
                  --------------------   --------------------
Dow                 33,044.56  -252.40     -1145.41    -3.35%
Nasdaq              10,852.27  -104.74      -148.83    -1.35%
S&P 500              3,898.85   -30.01       -84.32    -2.12%

NYSE Volume                      4.01B                       
NYSE Advancers                   1,245                       
NYSE Decliners                   1,822                       

Nasdaq Volume                    4.68B                       
Nasdaq Advancers                 1,698                       
Nasdaq Decliners                 2,888                       

                                 New Highs/Lows

                   01/12  01/13  01/16  01/17  01/18  01/19
                 --------------------------------------------
NYSE New Highs       108    104      0    126    101     40
NYSE New Lows         12      6      0     10      8     18
Nasdaq New Highs     139    122      0    136    115     72
Nasdaq New Lows       26     20      0     23     27     35
   

TRADER'S TIP: "Hey, That Stop Is Too Big. . ."

It's common for traders to think that a particular stop - say $5 or $10 - is "too big." While the size of a stop usually gets the most attention, the amount of money at risk is actually far more important. Just remember that a "big" stop doesn't equal big risk when your position size is small. To determine the correct number of shares to keep risk low, always plan your trade using the RightLine Risk Control Calculator.

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 - 3898.85 January 19, 2023

52-Week High: 4637.30
52-Week Low: 3491.58
Daily Trend: DOWN
Weekly trend: DOWN
Weekly Pivot Levels
Resistance 3: 4213.43
Resistance 2: 4086.77
Resistance 1: 4042.93
Pivot: 3960.11
Support 1: 3916.27
Support 2: 3833.45
Support 3: 3706.79

NASDAQ Composite - 10852.27 January 19, 2023

52-Week High: 14646.90
52-Week Low: 10088.83
Daily Trend: DOWN
Weekly trend: DOWN
Weekly Pivot Levels
Resistance 3: 11906.42
Resistance 2: 11412.00
Resistance 1: 11245.58
Pivot: 10917.58
Support 1: 10751.16
Support 2: 10423.16
Support 3: 9928.74
        
Dow Industrials - 33044.56 January 19, 2023

52-Week High: 35824.28
52-Week Low: 28660.94
Daily Trend: DOWN
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 35863.28
Resistance 2: 34942.76
Resistance 1: 34622.68
Pivot: 34022.24
Support 1: 33702.16
Support 2: 33101.72
Support 3: 32181.20
 

Market Calendar

ECONOMIC REPORTS AND EVENTS (all times are Eastern):    

Monday, January 23, 2023:
23-Jan  10 am   Leading economic indicators

Tuesday, January 24, 2023:
24-Jan  9:45 am   
24-Jan  9:45 am   

Wednesday, January 25, 2023:
25-Jan          None scheduled

Thursday, January 26, 2023:
26-Jan  8:30 am   Initial jobless claims
26-Jan  8:30 am   Continuing jobless claims
26-Jan  8:30 am   Real gross domestic product, first estimate (SAAR)
26-Jan  8:30 am   Real final sales to domestic purchasers, first estimate (SAAR)
26-Jan  8:30 am   Trade in goods (advance)
26-Jan  8:30 am   Durable goods orders
26-Jan  8:30 am   Core capital goods orders
26-Jan  8:30 am   Chicago Fed national activity index
26-Jan  10 am   New home sales (SAAR)

Friday, January 27, 2023:
27-Jan  8:30 am   Real disposable incomes (SAAR)
27-Jan  8:30 am   Real consumer spending (SAAR)
27-Jan  8:30 am   PCE price index
27-Jan  8:30 am   Core PCE price index
27-Jan  8:30 am   PCE price index, year-over-year
27-Jan  8:30 am   Core PCE price index, year-over-year
27-Jan  10 am   UMich consumer sentiment index (late)
27-Jan  10 am   UMich 1-year inflation expectations (late)
27-Jan  10 am   UMich 5-year inflation expectations (late)
27-Jan  10 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: "When's The Next Flight To Vegas?"

Many traders are just gamblers - they throw money at the market with no real plan or method. Sometimes they win big, and sometimes they lose big, but ultimately they lose it all. Technical analysis and risk control gives us an edge that can be used within a disciplined routine to avoid the gambler's trap. There's no need for gambling or impulsive trading when your decision-making process is based on specific rules.

Stocks Covered in This Issue

CONSUMER CYCLICAL SECTOR

Canada Goose Holdings Inc. (GOOS: Consumer Cyclical/Apparel Manufacturing) - BULLISH BOUNCE. Looking a bit frayed after sliding downhill in recent sessions, on Friday GOOS seemed intent on initiating a rebound. With moving average support nearby, GOOS 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 21.42. Manage risk with a 1.96 stop. Tighten your stop to 0.98 when you have a 1.44 profit. GOOS ended the day at 21.14. Earnings Report Date: Feb 02, 2023. Beta: 1.44. Market-Cap: 2.224B. Optionable.

FINANCIAL SERVICES SECTOR

360 DigiTech, Inc. (QFIN: Financial Services/Credit Services) - BULLISH BOUNCE. Up-trending stocks like QFIN 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, QFIN is poised to lift off again. To take advantage of this setup, prepare to BUY shares at 22.99 if positive price action occurs. As always, follow your entry with a trailing stop. A 1.89 trailer should work well with QFIN. Tighten it to 0.95 on a 1.92 gainer. Earnings Report Date: Mar 08, 2023. Beta: 0.33. Market-Cap: 3.584B. Optionable.

HEALTHCARE SECTOR

Verve Therapeutics, Inc. (VERV: Healthcare/Biotechnology) - 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 21.59. Anticipate the rebound to continue, and be ready to buy VERV at 22.37. Follow your entry with a trailing stop of 2.35 which can be tightened to 1.18 on a 2.54 profit. Earnings Report Date: N/A. Beta: N/A. Market-Cap: 1.33B. Optionable.

Relay Therapeutics, Inc. (RLAY: Healthcare/Biotechnology) - 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 RLAY's case we will enter a BUY should it reach the 21.05 level, or a SELL short trade if it drops to 19.4. As usual a trailing stop is essential, 1.65 which should be tightened to 0.83 on a 1.78 gain. RLAY closed Friday at 20.58. Earnings Report Date: Feb 22, 2023. Beta: 1.01. Market-Cap: 2.488B. Optionable.

INDUSTRIALS SECTOR

Arconic Corporation (ARNC: Industrials/Metal Fabrication) - BULLISH BOUNCE. If you are looking for another bouncer with profits in mind, ARNC 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 23.38, plan to buy shares at 23.9 and use a 1.75 trailing stop. Tighten the stop to 0.88 on a 1.56 gain. Earnings Report Date: Feb 16, 2023. Beta: 2.02. Market-Cap: 2.373B. 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 Breadth"

Have you ever noticed that just a few stocks can have a huge affect on the overall market? Both the Dow and the NASDAQ are susceptible to making a big move based on just a few moving stocks. The Dow contains only 30 stocks, so a large drop in one of its components can really affect this index. Similarly, since the NASDAQ gives more weight to its largest companies, a big move by just a few heavy hitters can dramatically change the index's end of the day result.

So how can we quickly find out whether a move in the market was driven by just a few stocks or by a majority of stocks? In other words, how can we determine market "breadth?"

The most common measurement of market breadth compares the number of advancing stocks to the number of declining stocks. There are several indicators that present the results in various formats, but they all basically deliver the same data. Each of them is based on how many stocks were up on the day, and how many were down.

The undisputed king of advancing and declining indicators is the Advance/Decline Line, or "A/D Line". When compared to the movement of a market index like the Dow or S&P 500, the A/D Line has proven to be an effective gauge of the stock market's breadth and strength.

When more stocks are advancing than declining, the A/D Line moves up, and when decliners outnumber advancers, the A/D Line moves down. Many traders feel that the A/D Line is a better indication of market strength than more frequently used indices such as the Nasdaq, Dow, or S&P 500 Index. Charting the trend of the A/D Line allows you to determine if the strength of the overall market is rising or falling.

One common way to use the A/D Line is to look for a difference of opinion between an index like the Dow and the A/D Line. Often, an end to a bear market can be anticipated when the A/D Line begins to flatten out and turn upward at the same time the Dow is still making new lows.



In the past, when a divergence develops between the Dow and the A/D Line, the Dow has typically reversed and followed the direction of the A/D Line. Sometimes a military example is used to explain the relationship between the A/D Line and the Dow. The idea is that when the soldiers (the A/D Line) refuse to follow their leaders (new highs in the Dow), then the leaders will follow the direction of the soldiers. Sort of a broad based mutiny!

Although there are AD lines for the Nasdaq and the Amex, the New York Stock Exchange (NYSE) is the most commonly used measure of market breadth. Keep in mind that the specific level of the AD line isn't important, it's the trend of the line that matters. Always check to see if it is trending in the same direction and a similar rate as the underlying market index. If the two lines aren't in sync, consider it a sign that a trend reversal may be in the near future.

The A/D Line also helps to confirm whether the market has already bottomed. If the line stays flat while the market moves higher, the rally may just be a relief rally. In the best scenario, the line will rise too. Like all other indicators the A/D Line isn't fool proof. A market bottom may move in step with the A-D line, or it may not occur for months. The A/D Line certainly has value as a timing tool, but shouldn't be used as a stand-alone decision maker.

It is always wise to consider a broad body of evidence when anticipating future price direction!

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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