Notes From The Editor

Here's a question we received asking how to avoid a common problem with market makers ...

Hi RightLine,

I know you usually recommend trailing stops, but my question relates to how a trader can stop a market-maker or other large trader from "sweeping stops" by placing a closed market bid well below the closing price of the previous day.

Example: I had a small position in ABC which closed Moneday at 50.62, my stop was 49.80, spread is typically much less than 10 cents. The next session's opening price was 50.42, yet a market-maker had bid 49.72 overnight thereby sweeping away my stop and triggering a sale at 50.43 on the next tick.

My immediate reaction was to widen on-line broker stops on other positions and maintain narrower "mental stops"; however, I am not an all-day-every-day trader and I don't want to suffer a loss if I am away from my trading computer when some unexpected event drops one of my positions.

Does the market-maker have knowledge of all the stops placed on his market stocks, or perhaps those within a certain number of basis points from the last actual price? If so, then I could know to keep the stop a slightly greater distance from the last price than the market-maker's knowledge. My education as a trader continues every day, but I sometimes wish it would be less costly.

Thanks!

TK

Answer:

Hi TK,

Yes, market makers have access to ALL live orders. However, one way to avoid market makers from sweeping your stops is to use a trading program that has "conditional order" features. This type program holds your (stop) order info on your computer or their server until the conditions are met (conditions like price, volume, time of day, ect.). Once your conditions are met, the order is placed.

Using this type platform prevents your order from being exposed to market maker sweeps that often occur overnight and at other times when trading volume is low. Unfortunately some online brokerage platforms don't have this capability. Instead, they immediately place the stop order "live" on the exchange as soon as you enter it into their server. That makes your order visible to market makers, who in turn use the technique you describe below to sweep out the typical trader at a discount price, then add the newly acquired shares to their inventory to sell at a higher price for a profit.

One of the best options I know is to use a trading platform with conditional order placement. Another alternative is to use end-of-day closing prices to trigger your stops, then exit the position next session at the opening bell.

Trade Well!

- Thomas Sutton, Editor

Quick List

    
Stock     07/14     07/14      Buy      Short   Trailing Stops     Gain 
Symbol    Price      +/-      Entry     Entry   Initial/Tighten   Amount 
------  --------  --------  --------  --------  ---------------  --------

BIG       21.99     -0.86     22.84     21.25         1.59/0.8      2.34
AMLX      20.29      0.11     21.41                  2.33/1.17       4.3
DH        24.50     -0.19     25.16                  2.03/1.02      2.64
RAPT      20.05     -0.48     20.57     18.97          1.6/0.8      2.88
LAW       20.95     -1.15     22.24     19.86        2.38/1.19      2.74

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

US stocks finished in a mixed fashion on Thursday following news that producer price inflation remains seriously elevated, with June numbers at 11.3% year-over-year, and unemployment claims continue to increase. In equities, Conagra Brands (CAG $33) beat earnings forecasts but announced soft full-year guidance due to inflation, while JPMorgan Chase & Co. (JPM $108) fell short of quarterly profit projections. Treasuries were mixed, the USD/dollar rallied to multi-decade highs, oil prices and gold were lower.

                        Jul 13, 2022           Jul 14, 2022   
                  --------------------   --------------------
Dow                 30,772.79  -208.54     30,630.17  -142.62
Nasdaq              11,247.58   -17.15     11,251.19     3.60
S&P 500              3,801.78   -17.02      3,790.38   -11.40

NYSE Volume                      4.17B                  4.24B
NYSE Advancers                   1,392                    861
NYSE Decliners                   1,788                  2,368

Nasdaq Volume                    4.44B                  4.46B
Nasdaq Advancers                 2,162                  1,447
Nasdaq Decliners                 2,346                  3,067

                                 New Highs/Lows

                   07/07  07/08  07/11  07/12  07/13  07/14
                 --------------------------------------------
NYSE New Highs        11      7      5     10      3      3
NYSE New Lows         59     56    132    158    211    379
Nasdaq New Highs      24     27     23     23     23     17
Nasdaq New Lows      118     83    182    211    297    448
   

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 - 3790.38 July 14, 2022

52-Week High: 4818.62
52-Week Low: 3636.85
Daily Trend: DOWN
Weekly trend: DOWN
Weekly Pivot Levels
Resistance 3: 4206.19
Resistance 2: 4029.75
Resistance 1: 3964.56
Pivot: 3853.31
Support 1: 3788.12
Support 2: 3676.87
Support 3: 3500.43

NASDAQ Composite - 11251.19 July 14, 2022

52-Week High: 16212.23
52-Week Low: 10565.14
Daily Trend: DOWN
Weekly trend: DOWN
Weekly Pivot Levels
Resistance 3: 12968.65
Resistance 2: 12190.40
Resistance 1: 11912.85
Pivot: 11412.15
Support 1: 11134.60
Support 2: 10633.90
Support 3: 9855.65
        
Dow Industrials - 30630.17 July 14, 2022

52-Week High: 36952.65
52-Week Low: 29653.27
Daily Trend: DOWN
Weekly trend: DOWN
Weekly Pivot Levels
Resistance 3: 33380.92
Resistance 2: 32224.58
Resistance 1: 31781.36
Pivot: 31068.24
Support 1: 30625.02
Support 2: 29911.90
Support 3: 28755.56
 

Market Calendar

ECONOMIC REPORTS AND EVENTS (all times are Eastern):    

Friday, July 15, 2022:
15-Jul  8:30 am   Retail sales
15-Jul  8:30 am   Retail sales excluding vehicles
15-Jul  8:30 am   Import price index
15-Jul  8:30 am   Empire state manufacturing index
15-Jul  9:15 am   Industrial production index
15-Jul  9:15 am   Capacity utilization
15-Jul  10 am   UMich consumer sentiment index (preliminary)
15-Jul  10 am   UMich 5-year inflation expectations (preliminary)
15-Jul  10 am   Business inventories


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

TRADER'S TIP: "How to Enter A Running Stock"

After a strong move higher, stocks will often digest the movement by taking small steps down into a narrow range over a three to four day period. The excitement generated by the previous up-move is likely to attract more demand for the stock by the third or fourth session. This can present a good opportunity to enter, but wait for prices to clearly breakout above the previous day's higher before buying.

Stocks Covered in This Issue

CONSUMER DEFENSIVE SECTOR

Big Lots, Inc. (BIG: Consumer Defensive/Discount Stores) - SQUEEZE PLAY. The ticker for Thursday's session shows BIG is now stuck in a tight price band. With the cyclical contraction and expansion nature of volatility in force, we should see a new period of price expansion in the days ahead. To improve the odds of catching the next directional wave, place a BUY trigger at 22.84 and a SELL short trigger at 21.25. When BIG starts moving out of its narrow range, your order will be triggered. Once you're in the trade, cancel the opposing trigger and set a 1.59 trailing stop. Upon reaching a 2.34 profit, resize the stop to 0.8. Earnings Report Date: Aug 25, 2022. Beta: 2.11. Market-Cap: 635.896M. Optionable.

HEALTHCARE SECTOR

Amylyx Pharmaceuticals, Inc. (AMLX: 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 Thursday's session to close at 20.29. Anticipate the rebound to continue, and be ready to buy AMLX at 21.41. Follow your entry with a trailing stop of 2.33 which can be tightened to 1.17 on a 4.3 profit. Earnings Report Date: N/A. Beta: N/A. Market-Cap: 1.188B. Optionable.

Definitive Healthcare Corp. (DH: Healthcare/Health Information Services) - BULLISH BOUNCE. Up-trending stocks like DH 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 Thursday, DH is poised to lift off again. To take advantage of this setup, prepare to BUY shares at 25.16 if positive price action occurs. As always, follow your entry with a trailing stop. A 2.03 trailer should work well with DH. Tighten it to 1.02 on a 2.64 gainer. Earnings Report Date: N/A. Beta: N/A. Market-Cap: 2.393B. 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 Thursday 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 20.57 and a SELL short trigger at 18.97. When RAPT moves outside of Thursday's range, one of the orders will be filled. Once you hold a position of shares, cancel the unfilled order and place a 1.6 trailing stop. After you've got a 2.88 profit, tighten the stop to 0.8. RAPT closed at 20.05 on Thursday. Earnings Report Date: Aug 09, 2022. Beta: 0.72. Market-Cap: 594.418M. Optionable.

TECHNOLOGY SECTOR

CS Disco, Inc. (LAW: Technology/Software-Application) - SQUEEZE PLAY. LAW shareholders know what it feels like to be squeezed. Thursday's slim price range reveals uncertainty on both sides of the table, a situation which often resolves itself by either Bears or Bulls quickly gaining a clear advantage. The question is "who will win?" Near-term market action tell us whether we should sell short or we should buy shares instead. LAW closed Thursday at 20.95. The plan is to enter in the right direction by placing a BUY trigger at 22.24 and a SELL short trigger at 19.86. Once LAW establishes direction, place your triggered order. As soon as you are in the trade, place a trailing stop in the amount of 2.38. After you've collected a 2.74 profit, tighten the stop to 1.19. Earnings Report Date: N/A. Beta: N/A. Market-Cap: 1.228B. 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  
---------------- -------     --------    -------     ------  -------   
Gamestop          GME        7/7/2022   7/22/2022    4-for-1   Yes
Alphabet          GOOG       2/1/22     7/18/22     20-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.

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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