January 22, 2022 - The RightLine Report
Notes From The Editor
Unexpected volatility is a fact of life in the stock market. For traders holding at least a few days, it's important to keep stop losses wide enough to ride out the daily gyrations - while at the same time, keeping risk to a manageable minimum. It's a balancing act that's easier said than done.
The simple act of using a stop-loss puts you head and shoulders above many traders/investors. Placing a limit on how much you stand to lose on any given trade prevents a manageable loss from turning into a big hit.
Stop placement, however, isn't an automatic and thoughtless procedure. Good stops take into account both a trader's intended timeframe and the stock's expected volatility.
Traders who intend to remain in a trade for more than a day will need to be prepared to ride out more price movement. Similarly, more movement should be expected of a stock with heightened volatility.
Imagine buying a stock that's sitting at 35.00. A trader might choose to place a stop at 34.50, with the thought that it's a great way to limit downside risk. This might very well be the case - but only if the equity tends to be a slow mover. Banking, utility, and raw materials stocks often fall into this category.
On the other hand, you'd run the risk of being stopped out in a matter of hours if you're dealing with a more volatile mover - something like a tech stock that covers a wide price range throughout a session.
The "Beta" line you find at the end of every stock write-up gives some insight into how much price movement to expect. A Beta of 1.00 means that an equity tends to be as volatile as the S&P 500, while a reading of 2.00 would indicate twice as much volatility.
"Average True Range" (ATR) is another way to gauge choppiness. The indictor measures the average range that a stock traces in one session. Under most circumstances, a trade's initial stop should never be less that the ATR. This would be begging to get bounced out of a stock before it had a chance to perform.
Rightline set-ups are typically designated with a "swing trade" in mind. The holding period is expected to be anywhere from 3 days to 3 weeks, sometimes longer. Our analysts determine stops based on the anticipated movement that a stock might experience over that timeframe, taking into account both the Beta and ATR. Technical analysis also plays a key role here; analyzing a daily chart often reveals subtle tendencies that don't show up in the indicators.
Stop placement is anything but arbitrary. After all, how you get out is just as important as how you get in.
Here's to profits!
Kent Barton
Senior Analyst
Stocks Covered Today Stock Splits Trader's Corner
Quick List
Stock 01/21 01/21 Buy Short Trailing Stops Gain
Symbol Price +/- Entry Entry Initial/Tighten Amount
------ -------- -------- -------- -------- --------------- --------
ECPG 64.26 0.45 65.61 4.41/2.21 2.78
MSB 31.80 -0.31 32.76 2.59/1.3 2.78
NEO 21.59 -0.29 22.54 20.67 1.87/0.94 3.88
CCXI 25.06 -1.58 26.67 23.66 3.01/1.51 4.22
OPNT 25.64 0.42 26.04 23.62 2.42/1.21 4.38
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.
Stocks Covered Today Stock Splits Trader's Corner
Market Summary
Stocks ended the week lower on Friday, recording the third consecutive bearish week in the new year. Driving the recent downtrend are trader expectations of rising interest rates and the economic implications of a more aggressive Fed Bank response to inflation pressures. In equities headlines, shares of Netflix (NFLX $398) fell hard after the media company's excellent earnings report was overshadowed by guidance suggesting subscriber growth and revenue will be decisively below forecasts in the next quarter. In other news, Intel Corporation (INTC $52) announced an initial $20-Billion investment to build chip factories in Ohio. The U.S. dollar dipped, and gold prices traded to the downside. Gold, oil and the USD/dollar declined, while treasuries were significantly higher which applied downward pressure on yields.
Friday On The Week
-------------------- --------------------
Dow 34,265.37 -450.02 -1646.44 -4.58%
Nasdaq 13,768.92 -385.10 -1124.83 -7.55%
S&P 500 4,397.94 -84.79 -264.91 -5.68%
NYSE Volume 5.6B
NYSE Advancers 680
NYSE Decliners 2,757
Nasdaq Volume 5.85B
Nasdaq Advancers 896
Nasdaq Decliners 4,006
New Highs/Lows
01/14 01/17 01/18 01/19 01/20 01/21
--------------------------------------------
NYSE New Highs 101 0 97 50 32 8
NYSE New Lows 199 0 299 312 264 525
Nasdaq New Highs 79 0 89 38 26 22
Nasdaq New Lows 683 0 818 772 682 1,316
Stocks Covered Today Stock Splits Trader's Corner
TRADER'S TIP: "No One Knows"
The stock market is a world shaped by human behavior, and no one has the slightest idea of what will happen in the future. Successful traders don't base their actions on what they THINK will happen, but instead they respond to what DOES happen. Price can only do three things; go up, go down, or go sideways. Plan ahead for all three, and you can react intelligently to whatever the market decides to do.
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 - 4397.94 January 21, 2022
52-Week High: 4818.62
52-Week Low: 3694.12
Daily Trend: DOWN
Weekly trend: DOWN
Weekly Pivot Levels
Resistance 3: 5025.78
Resistance 2: 4755.96
Resistance 1: 4576.95
Pivot: 4486.14
Support 1: 4307.13
Support 2: 4216.32
Support 3: 3946.50
NASDAQ Composite - 13768.92 January 21, 2022
52-Week High: 16212.23
52-Week Low: 12397.05
Daily Trend: DOWN
Weekly trend: DOWN
Weekly Pivot Levels
Resistance 3: 16410.44
Resistance 2: 15277.02
Resistance 1: 14522.97
Pivot: 14143.60
Support 1: 13389.55
Support 2: 13010.18
Support 3: 11876.76
Dow Industrials - 34265.37 January 21, 2022
52-Week High: 36952.65
52-Week Low: 29856.30
Daily Trend: DOWN
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 38364.27
Resistance 2: 36597.36
Resistance 1: 35431.36
Pivot: 34830.46
Support 1: 33664.46
Support 2: 33063.55
Support 3: 31296.64
Stocks Covered Today Stock Splits Trader's Corner
Market Calendar
ECONOMIC REPORTS AND EVENTS (all times are Eastern): Monday, January 24, 2022: 24-Jan 9:45 am Markit manufacturing PMI (flash) 24-Jan 9:45 am Markit services PMI (flash) Tuesday, January 25, 2022: 25-Jan 9 am 25-Jan 9 am FHFA national home price index (year-over-year change) 25-Jan 10 am Consumer confidence index Wednesday, January 26, 2022: 26-Jan 8:30 am Advance report on trade in goods 26-Jan 10 am New home sales starts (SAAR) 26-Jan 2 pm FOMC statement 26-Jan 2:30 pm Fed Chair Jerome Powell news conference Thursday, January 27, 2022: 27-Jan 8:30 am Initial jobless claims (regular state program) 27-Jan 8:30 am Continuing jobless claims (regular state program) 27-Jan 8:30 am Gross domestic product (SAAR) 27-Jan 8:30 am Final sales of domestic product (SAAR) 27-Jan 8:30 am Durable goods orders 27-Jan 8:30 am Core capital equipment orders 27-Jan 10 am Pending home sales index Friday, January 28, 2022: 28-Jan 8:30 am Real disposable incomes 28-Jan 8:30 am Real consumer spending 28-Jan 8:30 am PCE inflation (month-to-month change) 28-Jan 8:30 am Core PCE inflation (month-to-month change) 28-Jan 8:30 am PCE inflation (year-over-year change) 28-Jan 8:30 am Core PCE inflation (year-over-year change) 28-Jan 8:30 am Personal income (nominal) 28-Jan 8:30 am Consumer spending (nominal) 28-Jan 8:30 am Employment cost index 28-Jan 10 am UMich consumer sentiment index (final) 28-Jan 10 am UMich 5-year inflation expectations (final) For a chart of typical Up or Down market reactions to specific major US economic reports go to: Economic Indicator Effects
Stocks Covered Today Stock Splits Trader's Corner
TRADER'S TIP: "Earnings Conference Calls"
Since the SEC implemented the Fair Disclosure laws, most companies have begun allowing individual shareholders to listen in on earnings conference calls that were previously limited to analysts only. If you are tracking a stock as it approaches its scheduled earnings announcement, always look for the related conference call and mark it on your calendar.
The behavior of the stock during the call can telegraph early reaction to management's explanation of earnings related events. If you can't find any mention of the call, give the firm's Investor Relations department a ring and ask when or if a call will be held.
Stocks Covered in This Issue
FINANCIAL SERVICES SECTOR
Encore Capital Group, Inc. (ECPG: Financial Services/Mortgage Finance) - NEW HIGH DIP. The price momentum required to set a new high doesn't usually disappear over night. Traders can capitalize on this fact by entering positions when stocks making new highs pull back to a support level, then follow the pullback with signs of bouncing higher. ECPG meets the setup criteria, so get ready to BUY into this outstanding performer at 65.61. Enter a trailing stop of 4.41 when your order is filled, then tighten it to 2.21 on a 2.78 gain. Earnings Report Date: Feb 22, 2022. Beta: 1.42. Market-Cap: 1.881B. Optionable.
Mesabi Trust (MSB: Financial Services/Mortgage Finance) - BULLISH BOUNCE. Another bullish bouncer, MSB 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 MSB reaches our entry trigger set at 32.76. Also place a 2.59 trailing stop which can be narrowed to 1.3 when you reach a 2.78 profit. MSB closed Friday at 31.80. Earnings Report Date: N/A. Beta: N/A. Market-Cap: 417.216M. Optionable.
HEALTHCARE SECTOR
NeoGenomics, Inc. (NEO: Healthcare/Diagnostics & Research) - SQUEEZE PLAY. Friday's trading session left NEO in a very narrow price range after buyers and sellers fought to a near stalemate. Both sides are looking for some traction, and a breakout either way could provide a nice gain in the short term. To get aboard, set your BUY trigger at 22.54 and your SELL short trigger at 20.67. One of the orders will be triggered by upcoming price action. When your market order is filled, cancel the remaining trigger and enter a 1.87 trailing stop. Once you have a 3.88 profit, reduce the stop to 0.94. Earnings Report Date: Feb 22, 2022. Beta: 0.63. Market-Cap: 2.658B. Optionable.
ChemoCentryx, Inc. (CCXI: Healthcare/Biotechnology) - SQUEEZE PLAY. CCXI 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 26.67 and a SELL short entry at 23.66. Once your trade is filled, enter a 3.01 trailing stop. Tighten it to 1.51 after a 4.22 gain. CCXI closed on Friday at 25.06. Earnings Report Date: Feb 28, 2022. Beta: 1.77. Market-Cap: 1.755B. Optionable.
Opiant Pharmaceuticals, Inc. (OPNT: Healthcare/Biotechnology) - SQUEEZE PLAY. Traders are feeling the pressure as OPNT'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 26.04 and a SELL short entry at 23.62. OPNT's price movement will decide which entry is filled. As soon as you're in the trade, enter a 2.42 trailing stop. Tighten it to 1.21 after you get a 4.38 gain. OPNT closed Friday at 25.64. Earnings Report Date: Mar 02, 2022. Beta: 0.49. Market-Cap: 121.028M. Not 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.
Stocks Covered Today Stock Splits Trader's Corner
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.
Stocks Covered Today Stock Splits Trader's Corner
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.
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