January 28, 2023 - The RightLine Report
Notes From The Editor
Common Trading Mistakes...And How to Avoid Them (Part III)
In recent RightLine Reports we've looked at potholes and traps that can wreak havoc on even the most carefully-formulated trading strategies. Here are three more common mistakes for your consideration.
Mistake #6: Trading stocks like you're gambling in a casino
On the surface, trading and gambling seen to have a lot in common. You risk money to make money. Sometimes you're lucky, sometimes you're not. Occasionally you'll find yourself on a hot streak or losing streak. But dig deeper, and you'll find that Wall Street is a far cry from Vegas.
The most important difference? When trading, the only "house" advantage is the commission you pay your brokerage. The odds aren't inherently stacked against you. But traders sometimes make the mistake of being haphazard with their choices; they throw their money at a stock without really taking the time to think it through, or without using risk management techniques. This approach might work okay at the craps table, but it's ill-suited to trading.
Mistake #7: Averaging down
This goes hand-in-hand with a mistake we covered last week: holding on to losing positions. This trap is easy to fall into unless you have some serious discipline. It's human nature to look for the silver lining in a bad situation. But if you're holding a losing position, buying more shares at a cheaper price is rarely a good option.
Think of it this way: if the stock is already heading the opposite direction, then it's not behaving the way you thought it would. Something is amiss. Buying more shares and averaging down will only compound your losses if the equity continues to go against you. The better approach is to keep your original stop in place, and focus your resources on finding promising set-ups somewhere else.
Mistake #8: Overtrading
Constant trading can be tempting because you're more likely to hit a nice winner. However, you'll also be more likely to throw caution to the wind and be less selective when finding potential trades. And boy oh boy, do brokerages love this mistake; commissions can add up fast when you're overtrading, eating away at any profits you may have accumulated.
Frantic trading may be the bread-and-butter of daytraders, but it's ill-suited to those who use a longer timeframe. The better approach is to be picky, trading only when a stock meets your requirements. Also remember that sometimes - especially in a sideways or extremely choppy and unpredictable market - staying on the sidelines is the best option.
Here's to profits,
Kent Barton
Senior Analyst
Stocks Covered Today Stock Splits Trader's Corner
Quick List
Stock 01/27 01/27 Buy Short Trailing Stops Gain
Symbol Price +/- Entry Entry Initial/Tighten Amount
------ -------- -------- -------- -------- --------------- --------
BOOM 21.34 -0.20 21.94 20.06 1.88/0.94 2.4
INGN 22.85 0.06 23.3 1.68/0.84 1.78
SDGR 22.97 0.07 23.59 1.65/0.83 2.36
VERV 22.42 0.40 23.22 21.12 2.1/1.05 2.58
AME 143.90 0.34 146.32 8.38/4.19 5.08
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.
Stocks Covered Today Stock Splits Trader's Corner
Market Summary
US stocks closed higher on Friday, ending a positive week as traders sorted out another full day of economic and earnings news. In equities, credit card company Visa (V $231)beat profit projections, while American Express (AXP $172) fell short of forecasts yet offered a positive outlook. Semi-conducter manufacturer Intel (INTC $28) disappointed shareholders with a fourth-consecutive quarter of declining sales and warned of future losses. Economic news was upbeat, as pending home sales chalked up a gain, personal income rose, and consumer sentiment was revised upward. The USD/dollar and treasury yields moved higher, oil and gold prices ended the session lower.
Friday On The Week
-------------------- --------------------
Dow 33,978.08 28.67 +602.59 1.81%
Nasdaq 11,621.71 109.30 +481.28 4.32%
S&P 500 4,070.56 10.13 +97.95 2.47%
NYSE Volume 3.92B
NYSE Advancers 1,798
NYSE Decliners 1,278
Nasdaq Volume 6.34B
Nasdaq Advancers 2,580
Nasdaq Decliners 1,930
New Highs/Lows
01/20 01/23 01/24 01/25 01/26 01/27
--------------------------------------------
NYSE New Highs 47 86 98 70 117 115
NYSE New Lows 16 8 25 13 11 6
Nasdaq New Highs 86 116 113 97 124 127
Nasdaq New Lows 28 35 35 43 42 40
Stocks Covered Today Stock Splits Trader's Corner
TRADER'S TIP: "EMAs, SMAs, or DMAs?"
Did you know that EMAs - Exponential Moving Averages - are calculated based on "yesterday's" EMA? That's where the "exponential" part comes in. This means that if you're looking at a 200 Daily EMA based on 500 days of data vs. 2000 days of data, the results will be different. This explains why various charts programs display differing EMAs for the same stock. Though this calculation also affects the shorter moving averages like the 22 and 50 DMA (Daily Moving Average), it is not as dramatic as with the 200 EMA. For daily charts the most widely used 200 MA is the 200 SMA (Simple Moving Average). However, in recent years some traders have begun using 200 EMAs because of the default settings in the charting packages. It pays to know which you are viewing. For the record, at RightLine we use EMAs for all moving averages except the 200 DMA, for which we use the SMA. One powerful feature found in RightLine and some other charting programs is the ability to change the time frame referenced on the chart. While this is a very helpful feature, be aware that changing this setting will affect any displayed EMAs (Exponential Moving Average) lines.
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 - 4070.56 January 27, 2023
52-Week High: 4637.30
52-Week Low: 3491.58
Daily Trend: UP
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 4328.24
Resistance 2: 4183.09
Resistance 1: 4126.82
Pivot: 4037.94
Support 1: 3981.67
Support 2: 3892.79
Support 3: 3747.64
NASDAQ Composite - 11621.71 January 27, 2023
52-Week High: 14646.90
52-Week Low: 10088.83
Daily Trend: UP
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 12706.34
Resistance 2: 12083.63
Resistance 1: 11852.67
Pivot: 11460.92
Support 1: 11229.96
Support 2: 10838.21
Support 3: 10215.50
Dow Industrials - 33978.08 January 27, 2023
52-Week High: 35824.28
52-Week Low: 28660.94
Daily Trend: UP
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 35587.44
Resistance 2: 34696.32
Resistance 1: 34337.20
Pivot: 33805.20
Support 1: 33446.08
Support 2: 32914.08
Support 3: 32022.96
Stocks Covered Today Stock Splits Trader's Corner
Market Calendar
ECONOMIC REPORTS AND EVENTS (all times are Eastern): Monday, January 30, 2023: 30-Jan None scheduled Tuesday, January 31, 2023: 31-Jan 8:30 am Employment cost index 31-Jan 9 am 31-Jan 9 am FHFA home price index (SAAR) 31-Jan 9:45 am Chicago business barometer 31-Jan 10 am Consumer confidence index 31-Jan 10 am Rental vacancy rate Wednesday, February 01, 2023: 01-Feb 8:15 am ADP employment report 01-Feb 9:45 am 01-Feb 10 am ISM manufacturing index 01-Feb 10 am Job openings 01-Feb 10 am Quits 01-Feb 10 am Construction spending 01-Feb 2 pm Federal funds rate 01-Feb 2 pm Federal funds projection 01-Feb 2:30 pm Fed Chair Jerome Powell news conference 01-Feb Varies Motor vehicle sales (SAAR) Thursday, February 02, 2023: 02-Feb 8:30 am Initial jobless claims 02-Feb 8:30 am Continuing jobless claims 02-Feb 8:30 am Productivity, first estimate (SAAR) 02-Feb 8:30 am Unit labor costs, first estimate (SAAR) 02-Feb 10 am Factory orders 02-Feb 8:30 am Core capital goods orders Friday, February 03, 2023: 03-Feb 8:30 am Nonfarm payrolls 03-Feb 8:30 am Unemployment rate 03-Feb 8:30 am Average hourly earnings 03-Feb 8:30 am Labor-force participation rate, 25-54 year-olds 03-Feb 9:45 am 03-Feb 10 am ISM services index 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: "For Dessert? Profit Pie"
Entering "long" positions just above support, and "short" positions just below resistance delivers a larger slice of the potential profit "pie" when the trade is favorable, and quick, small losses when it isn't.
Stocks Covered in This Issue
ENERGY SECTOR
DMC Global Inc. (BOOM: Energy/Oil & Gas Equipment & Services) - SQUEEZE PLAY. Friday's trading action forced BOOM's daily price range into an abnormally narrow state. This translates into opportunity; for the cyclical nature of price volatility is to shrink extensively, then swell rapidly as shares move in one direction or another. Instead of trying to predict the direction BOOM will take when price volatility begins to increase, we'll set both a BUY (long) and a SELL (short) trigger to get us into the right trade. Be ready to BUY shares at 21.94 if BOOM moves higher, and place your order to SELL short at 20.06 if price declines to that level. As usual follow your entry with a trailing stop, 1.88 should be sufficient. Reduce your stop to 0.94 on a 2.4 gain. BOOM closed Friday at 21.34. Earnings Report Date: Feb 22, 2023. Beta: 1.63. Market-Cap: 416.762M. Optionable.
HEALTHCARE SECTOR
Inogen, Inc. (INGN: Healthcare/Medical Devices) - BULLISH BOUNCE. INGN has charted an upward weekly trend until recently when sellers showed up to push prices lower. On Friday the selling ran into solid support. A potential bounce up from this level should attract buyers and likely return INGN to the previously established uptrend. The Bullish Bounce set-up is the basis for our BUY entry, so be ready to go long on a rise to our trigger at 23.3. Set a trailing stop of 1.68, tightening to 0.84 on a 1.78 profit. INGN closed at 22.85 on Friday. Earnings Report Date: Feb 23, 2023. Beta: 0.93. Market-Cap: 523.745M. Optionable.
Schrodinger, Inc. (SDGR: Healthcare/Health Information Services) - BULLISH BOUNCE. This trader-friendly setup turns repetitive stock behavior into real profits. Based on the tendency for up-trending stocks to drop briefly and then resume the up-trend, the Bullish Bounce places traders into excellent stocks when conditions are primed for more skyward movement. SDGR's current price action near moving average support signals a potential BUY entry at 23.59, followed by a 1.65 trailing stop which can be tightened to 0.83 upon earning 2.36. SDGR closed Friday at 22.97. Earnings Report Date: Feb 28, 2023. Beta: 0.89. Market-Cap: 1.636B. Optionable.
Verve Therapeutics, Inc. (VERV: Healthcare/Biotechnology) - SQUEEZE PLAY. VERV 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. VERV is now at 22.42. We can capture price action either way by placing a BUY trigger at 23.22 and a SELL short trigger at 21.12. Once VERV 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 2.1. When you acquire a 2.58 profit, tighten the stop to 1.05. Earnings Report Date: N/A. Beta: N/A. Market-Cap: 1.381B. Optionable.
INDUSTRIALS SECTOR
AMETEK, Inc. (AME: Industrials/Specialty Industrial Machinery) - NEW HIGH DIP. As a rule of thumb, outstanding stocks like AME continue to perform well for extended periods of time. The recent pullback from a new 52-week high gives us a chance to enter a position without taking much risk. AME's price behavior on Friday points to another move higher, so prepare to BUY shares at the trigger price of 146.32. Once in, follow the purchase with a 8.38 trailing stop. Change the stop to 4.19 upon gaining 5.08 points. AME closed Friday at 143.90. Earnings Report Date: Feb 02, 2023. Beta: 1.23. Market-Cap: 33.047B. 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
---------------- ------- -------- ------- ------ -------
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.
Stocks Covered Today Stock Splits Trader's Corner
Trader's Corner
The Gap Primer
Gaps are shock events that jolt price up or down and leave an "open window" to the last bar. Market folklore (such as the infamous "gaps Get filled") seems to offer guidance, but in reality it has little value. After all, many gaps never get filled. So how can we use these one-bar wonders to make good trades and increase profits? The first thing to do is figure out what kind of gap you're dealing with. It should fall into one of these three categories:
~ Breakaway gaps appear as markets break out into new trends, up or down.
~ Continuation gaps print about halfway through trends, when enthusiasm or fear overpowers reason.
~ Exhaustion gaps burn out trends with one last surge of emotion.
Certain trades work best with each gap type, so proper identification is extremely important. Use relative location and key characteristics to place them into the right category. There is also a psychological aspect to recognizing the correct gap. Breakaway gaps "surprise" because they appear suddenly on charts you've ignored. Continuation gaps "frustrate" because they pop up where you think price should reverse. Exhaustion gaps "relieve" because they print after you hold on for too long.
Trade the trend on the first pullback to a breakaway or continuation gap. In other words, buy the decline after a rally, or sell the rally after a decline. The odds favor a reversal back in the primary direction, even if these gaps fill. However, the pullback trade often requires great patience. Markets retest breakout gaps right after they occur, but many bars can pass before price returns to test a continuation gap.
Use the continuation gap to target major reversals. The first test usually occurs after closure of the exhaustion gap. But you can't trade it if you can't find it, so here's a trick: Wait until you can count three price moves, up or down. Then place a Fibonacci grid across the entire trend and look for a continuation gap at the 50% level. If you find one, place a limit order within the gap and wait for a test to occur. The retracement should provide enough support or resistance to force a reversal. Once the gap is filled, place a trailing stop and keep it close behind current price action.
Modern markets fill many continuation gaps for a bar or two before they reverse. If you're a defensive trader, place your order within this extreme price level. Many times you won't get filled, but you'll save yourself whipsaws from entering too early. Keep in mind the filled gap presents low risk only when volume remains flat and price doesn't gap back through the old gap to get there.
Exhaustion gaps print blowoffs that end a trend. This last burst of energy can occur on high volume, but the lack of it doesn't change the outcome. Exhaustion gaps fill easily, with price often heading lower in a hurry. After this reversal, use multiple time frame analysis to plan your next move. For example, an exhaustion gap may also print a continuation gap in the next larger time frame. Be patient if this sounds confusing. Seeing this three-dimensional landscape requires a sharp eye and a lot of charting experience.
This instructive article was written by Alan Farley, author of "The Master Swing Trader."
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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