Notes From The Editor

Quantum Trading

Scientists have confirmed Albert Einstein's theory that time is influenced by motion. In fact, if you take two atomic clocks, place one of them on the mantle of your fireplace for a day or two and send the other one rocketing through outer space at the speed of an asteroid, the clock on the mantle will show a faster time than the space traveling clock when it returns to earth.

At RightLine we use two clocks when trading - one that measures "normal" time, and one that accelerates under the influence of price movement. For example, if we expect a trade to take two or three days to develop, but three weeks later the price is still hovering at the same level we entered, the market clock has already told us that time is probably up.

On the other hand, if we enter a trade expecting a reasonable profit in two or three days, and within two hours the stock shoots up five times the expected profit amount, then there is usually no reason to hold it for the entire expected period.

Of course some of you might remind me that by using trailing stops you can lock in the windfall gains AND still stay in the trade - just in case it keeps going higher! You are absolutely right. And I'm sure you see my point about the two trading clocks.

In addition to the "time" component, another aspect of Quantum Trading is that most profits usually come from a relatively few big winners, while the remaining positions are made up of numerous small gainers and losers. This concept comes as a surprise to many traders, for most assume that a very high win-to-loss ratio is necessary to succeed in the markets. Fortunately this isn't the case.

Trying to maintain a high win-to-loss ratio usually results in taking small gainers too early, before they can develop into their full potential. At the same time there is a tendency to ignore losers, to hope that they will reverse course and turn into winners.

While holding onto losers is a common strategy, it just doesn't work over time. Regardless of which trading "clock" comes into play first, all it takes is one big loser to undo several positive trades. The key to Quantum Trading is to first focus on minimizing losses, then look to maximize gains by locking in profits as they accumulate.

Trade well!

~Thomas Sutton, Editor

Quick List

    
Stock     01/28     01/28      Buy      Short   Trailing Stops     Gain 
Symbol    Price      +/-      Entry     Entry   Initial/Tighten   Amount 
------  --------  --------  --------  --------  ---------------  --------

CONN      23.85      0.50     24.19                  1.93/0.97      2.42
DKS      113.19      1.26    114.78                  9.16/4.58      9.52
RENN      21.08      0.26     21.68     19.67        2.01/1.01      2.34
NCBS      91.71      0.47     92.91                  5.81/2.91      3.48
PGR      108.71      1.06    110.16                  6.55/3.28      3.66
GDRX      22.02      0.35     22.68     20.49         2.19/1.1      3.38

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.

Market Summary

A welcome Friday rally enabled stocks to end a volatile week higher despite uncertainty surrounding a potentially aggressive Fed Bank rate tightening campaign. Economic headlines highlighted improving employment costs for the fourth quarter compared to the third quarter's record high pace, a slower than expected increase in personal income, a decrease in spending and a surprise revision lowering recent consumer sentiment. In equities, Visa (V $228) and Apple (AAPL $170) topped earnings estimates, while Chevron (CVX $131) missed profit expectations. Treasuries and oil prices moved higher, gold was lower and the USD/dollar finished the session near even.

                      Friday                 On The Week      
                  --------------------   --------------------
Dow                 34,725.47   564.69       +460.1     1.34%
Nasdaq              13,770.57   417.79        +1.65     0.01%
S&P 500              4,431.85   105.34       +33.91     0.77%

NYSE Volume                      5.05B                       
NYSE Advancers                   2,265                       
NYSE Decliners                   1,130                       

Nasdaq Volume                    4.98B                       
Nasdaq Advancers                 3,175                       
Nasdaq Decliners                 1,627                       

                                 New Highs/Lows

                   01/21  01/24  01/25  01/26  01/27  01/28
                 --------------------------------------------
NYSE New Highs         8      7     18     44     36     10
NYSE New Lows        525    792    159    193    429    542
Nasdaq New Highs      22     18     25     34     22     20
Nasdaq New Lows    1,316  1,755    280    376    846  1,152
   

TRADER'S TIP: "Changing Horses In The Middle Of The Stream"

Here's another good reason to avoid changing rules in the middle of a trade. Waiting to finish the trade before making rule changes emphasizes the importance of having a "formal" set of trading procedures. Including a rule that regulates how and when you change your rules implies that you respect for your own rules. This one rule alone will improve your bottom line and set you apart from casual traders with no consistent methods.

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 - 4431.85 January 28, 2022

52-Week High: 4818.62
52-Week Low: 3694.12
Daily Trend: DOWN
Weekly trend: DOWN
Weekly Pivot Levels
Resistance 3: 4830.45
Resistance 2: 4599.84
Resistance 1: 4515.84
Pivot: 4369.23
Support 1: 4285.23
Support 2: 4138.62
Support 3: 3908.01

NASDAQ Composite - 13770.57 January 28, 2022

52-Week High: 16212.23
52-Week Low: 12397.05
Daily Trend: DOWN
Weekly trend: DOWN
Weekly Pivot Levels
Resistance 3: 15438.62
Resistance 2: 14530.62
Resistance 1: 14150.59
Pivot: 13622.62
Support 1: 13242.59
Support 2: 12714.62
Support 3: 11806.62
        
Dow Industrials - 34725.47 January 28, 2022

52-Week High: 36952.65
52-Week Low: 29856.30
Daily Trend: UP
Weekly trend: DOWN
Weekly Pivot Levels
Resistance 3: 37561.16
Resistance 2: 35895.82
Resistance 1: 35310.64
Pivot: 34230.49
Support 1: 33645.31
Support 2: 32565.15
Support 3: 30899.81
 

Market Calendar

ECONOMIC REPORTS AND EVENTS (all times are Eastern):    

Monday, January 31, 2022:
31-Jan  9:45 am   Chicago PMI

Tuesday, February 01, 2022:
01-Feb  9:45 am   Markit manufacturing PMI (final)
01-Feb  10 am   ISM manufacturing index
01-Feb  10 am   Job openings
01-Feb  10 am   Job quits
01-Feb  10 am   Construction spending

Wednesday, February 02, 2022:
02-Feb  8:15 am   ADP employment report
02-Feb  10 am   Home ownership rate

Thursday, February 03, 2022:
03-Feb  8:30 am   Initial jobless claims
03-Feb  8:30 am   Continuing jobless claims
03-Feb  9:45 am   Markit services PMI (final)
03-Feb  10 am   ISM services index
03-Feb  10 am   Factory orders
03-Feb  10 am   Core capital equipment orders (revision)

Friday, February 04, 2022:
04-Feb  8:30 am   Nonfarm payrolls (month to month)
04-Feb  8:30 am   Unemployment rate
04-Feb  8:30 am   Average hourly earnings (month-to-month)
04-Feb  8:30 am   Labor-force participation rate 25-54


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

TRADER'S TIP: "Looking for a Good Fortune Teller?"

You don't really need a psychic if you plan each position with a "what if" approach. Before entering any trade always ask - "What will I do if price moves in my favor, and what will I do if it moves against me?" Since most traders and investors never consider these questions at all, simply writing down specific answers will put you WAY ahead of the game. Remember to set any bias aside, and play the hand that's dealt.

Stocks Covered in This Issue

CONSUMER CYCLICAL SECTOR

Conn's, Inc. (CONN: Consumer Cyclical/Specialty Retail) - BULLISH BOUNCE. If you are looking for another bouncer with profits in mind, CONN 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 23.85, plan to buy shares at 24.19 and use a 1.93 trailing stop. Tighten the stop to 0.97 on a 2.42 gain. Earnings Report Date: Mar 29, 2022. Beta: 2.50. Market-Cap: 703.971M. Optionable.

DICK'S Sporting Goods, Inc. (DKS: Consumer Cyclical/Specialty Retail) - BULLISH BOUNCE. DKS 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 DKS 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 114.78. Set a trailing stop of 9.16, tightening to 4.58 on a 9.52 profit. DKS closed at 113.19 on Friday. Earnings Report Date: Mar 07, 2022. Beta: 1.74. Market-Cap: 9.802B. Optionable.

Renren Inc. (RENN: Consumer Cyclical/Auto & Truck Dealerships) - SQUEEZE PLAY. Trader indecision has put RENN 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 21.68 and a SELL short entry at 19.67. Now it's up to RENN to show us which entry will be filled. Once the trade is underway place a 2.01 trailing stop, which can be tightened to 1.01 after you achieve a 2.34 profit. RENN closed on Friday at 21.08. Earnings Report Date: N/A. Beta: 1.89. Market-Cap: 506.329M. Optionable.

FINANCIAL SERVICES SECTOR

Nicolet Bankshares, Inc. (NCBS: Financial Services/Banks-Regional) - NEW HIGH DIP. Another high-flyer, NCBS just recently set a new 12-month max price. Having dipped since then, NCBS's bullish response to an encounter with moving average support on Friday shows that the stock may be ready for another move skyward. Now at 91.71, an upward push to 92.91 will signal a BUY entry. Once in the trade, place a 5.81 trailing stop which can be tightened to 2.91 once you've gained 3.48. Earnings Report Date: Apr 18, 2022. Beta: 0.69. Market-Cap: 1.283B. Optionable.

The Progressive Corporation (PGR: Financial Services/Insurance-Property & Casualty) - NEW HIGH DIP. Confident in its ability to continue trending skyward, PGR's pullback from a new 52-week high sets the stage for a return to that peak. Price activity on Friday provided a setup, with the BUY trigger ready at 110.16 should PGR reach that level. Follow up your entry with a 6.55 trailing stop. Tighten it to 3.28 when you have a 3.66-point gain. PGR closed Friday at 108.71. Earnings Report Date: Feb 16, 2022. Beta: N/A. Market-Cap: 63.53B. Optionable.

HEALTHCARE SECTOR

GoodRx Holdings, Inc. (GDRX: Healthcare/Health Information Services) - SQUEEZE PLAY. The struggle between buyers and sellers has resulted in GDRX'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 22.68 and a SELL order at 20.49. Regardless of which order is triggered, cancel the other one and follow your entry with a 2.19 trailing stop. Tighten the stop to 1.1 once you have a 3.38 gain. GDRX closed Friday at 22.02. Earnings Report Date: Mar 09, 2022. Beta: N/A. Market-Cap: 8.783B. 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

Stops: One Size Doesn't Fit All

Knowing when to get out of a trade is every bit as important as knowing when to get in. Since the majority of our exits come as a result of our stops getting triggered, understanding the concepts and strategies behind setting those stops is critical to success.

Stops are the trader's first line of defense against trades that turn against you. Traders with longer time horizons will typically use much wider stops than short-term traders, so the best stop amount is not the same for everyone. As traders we are looking for stops that will take us out of a position before we incur significant losses, yet keep us in a trade if the stock is just wavering slightly before moving higher.

In this discussion we are assuming that traders are buying long positions rather than going short. However when going short the same concepts still apply, but in reverse.

When buying, it's usually best to set stops just below some type of support. When setting stops we have to identify the most significant support levels near the current price of the stock. At times the DMA (Daily Moving Average) will offer the strongest support, while in other cases a trend line or previous specific price level may provide stronger support.

Sometimes the best stop is the one set just below a specific price level. You may find that when a stock's price falls to a certain price level, demand increases and buyers begin to buy. This creates a "floor" or support level.

In contrast, you will find instances where a stock's price rises to a level where demand decreases and shareholders begin to sell. This is the "ceiling" or resistance level. The more times that the stock has bounced from a specific price level, the stronger the support or resistance.

When you see stocks that seem to have little or no consistent trend for any period of time, look to see if they tend to bounce back and forth between specific support and resistance points. If they do, these stocks can present great plays for short-term traders who buy just as the stock bounces off support.

Set your stop based on the daily trading range and continually move it upward using a trailing stop (see below) until it approaches resistance. Then tighten your stop. Once stopped out, wait for the next bounce off support and then repeat the process. Some traders will try to double the benefit offered by these range-bound stocks by going short as the stock bounces down from resistance and long on the bounce up from support.

If you buy a stock when it is breaking out to new highs, setting your stop at support may mean that you'll be exposed to quite a loss by the time the stock drops back to that level. Be sure to lower your position size so that the actual dollar risk is lessened.

Traders who intend to set their stops at one of these support levels should consider waiting for a pullback, and then buy on a bounce off of support rather than buying the breakout.

Buying breakouts is a momentum player's strategy. Very short term momentum traders often watch the stock as it climbs higher, set a close trailing stop mentally, and stay ready to pull the trigger when the stock slows or reverses its momentum.

As mentioned above, shorter-term traders normally use tighter stops. Using tighter stops translates into smaller losses if the stock turns south, but also increases the probability that you'll get jiggled out on a quick drop before the stock climbs higher. While these "unwanted" exits can sometimes be frustrating, they are just a part of the game for short-term traders.

NOTE: You can safely use larger stops by reducing your position size. The RightLine Risk Calculator makes it easy to select the optimum number of shares for a particular stop size.

We often talk about "Trailing Stops." A trailing stop is a stop that you move upward as the price of a stock appreciates. Here's how it works. You initially set a stop to minimize losses. Then as time goes on the trailing stop is adjusted in the profitable direction of the trade, which protects your gains.

Note that some brokers may not allow you to set an automatic "trailing stop." Depending on your broker, you may have to set a stop, and then when the stock appreciates, you cancel the initial stop and replace it with another higher stop. You then continue to move it up higher to protect your profit as the stock advances.

Some Pointers on Using Stops:

1. Decide where you will set your stop BEFORE YOU BUY.

2. Once you determine where to set your stop, calculate how many shares you can buy (position size) so that you will never risk more than 2% of your trading capital in one trade.

3. Set the stop the instant your buy order gets filled.

4. Move stops up as the stock rises, first to break even, then to protect profits. On a long position, NEVER lower a stop - only raise it.

5. As the stock moves up sharply, and looks like it may be "topping out" or if market conditions become unfavorable, tighten your stop, which will effectively employ an "up or out" strategy.

Different Stop Order Types

Note the difference between a stop-loss order and a stop-limit order. We recommend using "stop loss orders" rather than "stop-limit orders."

- Stop-Loss Orders

A stop-loss order is a sell order that will automatically turn into a market order to sell if the stop price is hit. A stop-loss order turns into a market order to sell when the stock's price reaches the stop price that you've set. This means that the stock will immediately be sold at the best available market price, regardless of what that price is, once your stop price is reached. If what you really want is to sell a stock if it falls to $X, you must use a stop market order.

- Stop-Limit Orders

A stop-limit order is a sell order that turns into a limit order to sell at a predetermined price after the stop price is hit. A limit order says in effect that you will sell only at a certain price or better. If the stock is dropping quickly or is gapped over, you may not be filled at your limit price and the stock could plummet as you continue to hold your shares.

Keep in mind that a stop-limit order may not fill even if the stock reaches the limit price. All limit orders are filled in sequence by the exchanges, so if the price changes due to the number of orders put in before yours, your order may not be filled.

More Pointers on Setting Stops

Another strategy is to set a stop below the previous or current day's low price. This technique is more effective on stocks with low volatility. It is a short-term approach for those who don't like to set wide stops. Once in a profitable position, some intermediate-traders may consider widening the stop loss or loosening the "trailer."

When you look at the chart of a stock, try to see which type of support and resistance has been strongest in the past. Probably the most important question you should ask yourself is "What level would I expect the stock to bounce up from?" The answer usually gives you a price level just above where you should set your stop.

- Average True Range (ATR)

Another good method is to take the Average True Range (ATR) over a number of days, multiply it by a chosen factor, and then place the stop an equal distance from the entry point of the trade. In order to prevent being stopped out by normal price movement, it is usually best to place the stop more than one ATR from the entry price. The main advantage of using an ATR stop is that it adapts very well to the current market environment. The distance from the entry point to the stop increases when market volatility is high, and decreases when volatility drops.

Most problems with the ATR Stop tend to occur when the short term ATR becomes much smaller than normal, and the narrow range stops result in being stopped out of the trade too soon. To prevent this, you can calculate two ATR stops - a shorter term 3 or 4 day ATR and a longer term 15 to 20 day ATR. Set your stops using whichever is the largest. This allows the stops to move away quickly but prevents them from moving in too close after a few unusually quiet days.

For quick bounce and reversal plays, you may not need (or want) the full range of the ATR. RightLine Chart users make a note that the default setting for the ATR indicator is 14 days, but you can change it by going to "Utilities" and "Parameters."

On any stock, there will be an assortment of choices that make reasonable stops. One size does not fit all. Among other factors, the stop to use will depend on your individual time frame and risk tolerance. With experience you can recognize the best levels and improve your chances of setting a successful stop.

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.

The publishers of The RightLine Report recommend that anyone trading securities should do so with caution, exercise prudent trading discipline and have a personal risk management strategy in place before doing so. It is possible at this or some subsequent date, the publishers and staff of The Pro Right Line Corp. may own, buy or sell securities presented. The Pro Right Line Corp. is not a financial advisory service. Its publishers, owners or investors, are not liable for any losses or damages, monetary or otherwise, that result from the content of The RightLine Report. Past RightLine Report performance may not be indicative of future performance.

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