Notes From The Editor

Everyone knows that Wall Street views stock splits in a positive light. Though some folks ignore this unique phenomenon, the performance records of stocks that split speak for themselves.

Companies who split their stock typically outperform the market by a significant amount for at least four years after the stock split. For example, studies at the University of Illinois and Rice University show that shares of stock splits on average outperformed the market by 8% during the year following the split, and by 12% over the next three years.

Although the historically strong link between stock splits and positive performance is well documented, the sheer number of stocks announcing splits at any given time is subject to the never-ending market cycles. During bull markets the number of stock splits soar, while during bear markets they are noticeably lower. Since each split announcement is an opportunity for traders, the number of oompanies announcing splits has an impact on results.

This means that to some degree a successful stock split trading strategy is dependent on sustained up-trends. There are always plenty of stock splits to trade when the markets go up for extended periods. However, when the market is down for an extended period or well below all time highs, the number of splits begins to shrink. So what is a split trader to do?

Fortunately there is a powerful counter-part to stock splits that serves the same purpose in bear or recovering markets as stock splits do in Bull markets approaching all time highs. It's called a reverse stock split. In the same way that stock splits point us to potential stocks to buy, reverse stocks splits help us to identify potential stocks to sell short.

A reverse split is merely a scheme to get a faltering stock's price up above $1 and out of the danger zone that causes companies to get dropped by an exchange. A reverse stock split reduces the number of shares and increases the share price in exact proportion. A reverse stock split has no affect on the total value of the position you own.

Example: A 1-for-2 reverse split means that you get one new share for every two shares that you currently own. If you own two shares of a one-dollar stock, after the reverse split you will own one share of a two-dollar stock.

Although reverse stock splits are intended to improve a bad situation, they usually do nothing to help matters. According to Michael Brush of MSN Money, close to 75% of all stocks wind up trading lower after a reverse split. In his words, "Though the intentions seem sound, it's better to look at a reverse split as a flashing red light warning that you may need to kick a stock out of your portfolio."

Or, if you're an active investor consider the stock as a potential short sell. The reason stocks usually continue to drop in price after a reverse split is because they are in serious trouble. It's wise to view news of a reverse split as an indication that the company has major problems that will probably get worse before they get better.

Bottom Line: Some companies that reverse split their stock will eventually recover and do well. However, academic studies show that the majority of these stocks continue to decline by an average of 37% during the three years following a reverse split. A sizeable portion of the drop in share price occurs in the first few months after the reverse split announcement. That's certainly good news for traders who like to take advantage of these types of short selling opportunities.

Trade well,

- Thomas Sutton, Editor

Quick List

    
Stock     07/21     07/21      Buy      Short   Trailing Stops     Gain 
Symbol    Price      +/-      Entry     Entry   Initial/Tighten   Amount 
------  --------  --------  --------  --------  ---------------  --------

EDU       23.06      0.04     23.67     21.92        1.75/0.88      3.24
CEIX      56.28     -0.70     57.36                  6.29/3.15      8.48
KYMR      22.75     -0.59     23.93     21.89        2.04/1.02      3.68
RLAY      23.34      0.20      23.8     21.91        1.89/0.95      3.92
SWIR      25.68     -0.07      26.3     24.39        1.91/0.96         3

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

The top US stock indexes were higher on Thursday despite the news that leading indicators declined for the fourth consecutive month, manufacturing output in the Philadelphia region moved further into the contraction zone, and unemployment claims continue to accelerate. In equities, American Airlines Group (AAL $14) and United Airlines Holdings (UAL $37) both announced disappointing earnings results, while Tesla (TSLA $815) topped projections but made note of production challenges in China. Treasuries and gold were higher, the USD/dollar and oil prices declined.

                        Jul 20, 2022           Jul 21, 2022   
                  --------------------   --------------------
Dow                 31,874.84    47.79     32,036.90   162.06
Nasdaq              11,897.65   184.50     12,059.61   161.96
S&P 500              3,959.90    23.21      3,998.95    39.05

NYSE Volume                      4.26B                  4.17B
NYSE Advancers                   2,196                  1,985
NYSE Decliners                   1,058                  1,216

Nasdaq Volume                    5.45B                  4.67B
Nasdaq Advancers                 3,184                  2,761
Nasdaq Decliners                 1,387                  1,776

                                 New Highs/Lows

                   07/14  07/15  07/18  07/19  07/20  07/21
                 --------------------------------------------
NYSE New Highs         3      9     17     14     13     12
NYSE New Lows        379     90     60     48     31     42
Nasdaq New Highs      17     38     30     37     44     34
Nasdaq New Lows      448    166    108     94     61     78
   

TRADER'S TIP: "Eyes On the Prize"

Have you set goals for your trading? While all of us are playing to win, it's important to have specific targets to aim for. This begins at the most basic level by identifying potential profit targets for individual trades. As a general rule of thumb, setups should only be taken if the potential for reward is at least twice the amount being risked. For longer-term success, set weekly, monthly, and yearly targets for your overall account. This wider perspective makes it easier to measure progress and gauge the effectiveness of your trading strategy.

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 - 3998.95 July 21, 2022

52-Week High: 4818.62
52-Week Low: 3636.85
Daily Trend: UP
Weekly trend: DOWN
Weekly Pivot Levels
Resistance 3: 4140.64
Resistance 2: 3981.26
Resistance 1: 3922.21
Pivot: 3821.88
Support 1: 3762.83
Support 2: 3662.50
Support 3: 3503.12

NASDAQ Composite - 12059.61 July 21, 2022

52-Week High: 16212.23
52-Week Low: 10565.14
Daily Trend: UP
Weekly trend: DOWN
Weekly Pivot Levels
Resistance 3: 12403.49
Resistance 2: 11868.32
Resistance 1: 11660.37
Pivot: 11333.15
Support 1: 11125.20
Support 2: 10797.98
Support 3: 10262.81
        
Dow Industrials - 32036.90 July 21, 2022

52-Week High: 36952.65
52-Week Low: 29653.27
Daily Trend: UP
Weekly trend: DOWN
Weekly Pivot Levels
Resistance 3: 33380.48
Resistance 2: 32156.86
Resistance 1: 31722.56
Pivot: 30933.24
Support 1: 30498.94
Support 2: 29709.62
Support 3: 28486.00
 

Market Calendar

ECONOMIC REPORTS AND EVENTS (all times are Eastern):    

Friday, July 22, 2022:
22-Jul  9:45 am   [S&P Global U.S. manufacturing PMI (flash)
22-Jul  9:45 am   [S&P Global U.S. services PMI (flash)


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

TRADER'S TIP: "Practice, Practice, Practice"

The purpose of rehearsal is to create the habit of the objective.

~ William H. Macy

Stocks Covered in This Issue

CONSUMER DEFENSIVE SECTOR

New Oriental Education & Technology Group Inc. (EDU: Consumer Defensive/Education & Training Services) - SQUEEZE PLAY. Trader indecision has put EDU 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 23.67 and a SELL short entry at 21.92. Now it's up to EDU to show us which entry will be filled. Once the trade is underway place a 1.75 trailing stop, which can be tightened to 0.88 after you achieve a 3.24 profit. EDU closed on Thursday at 23.06. Earnings Report Date: Jul 27, 2022. Beta: 0.37. Market-Cap: 3.913B. Optionable.

ENERGY SECTOR

CONSOL Energy Inc. (CEIX: Energy/Thermal Coal) - NEW HIGH DIP. Thursday's price action is telling us that CEIX is preparing to move back up to the 52-week high that was set just a few days ago. Our BUY trigger at 57.36 is ready to take advantage of a likely bounce from the current support level. Once your order is filled, enter a trailing stop of 6.29. Resize the stop to 3.15 after you reach a 8.48 profit. Earnings Report Date: Aug 04, 2022. Beta: 1.97. Market-Cap: 1.959B. Optionable.

HEALTHCARE SECTOR

Kymera Therapeutics, Inc. (KYMR: 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 KYMR's case we will enter a BUY should it reach the 23.93 level, or a SELL short trade if it drops to 21.89. As usual a trailing stop is essential, 2.04 which should be tightened to 1.02 on a 3.68 gain. KYMR closed Thursday at 22.75. Earnings Report Date: Aug 04, 2022. Beta: N/A. Market-Cap: 1.177B. Optionable.

Relay Therapeutics, Inc. (RLAY: Healthcare/Biotechnology) - SQUEEZE PLAY. The struggle between buyers and sellers has resulted in RLAY's narrowest trading range of the past seven sessions. With neither group able to take complete control on Thursday, 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 23.8 and a SELL order at 21.91. Regardless of which order is triggered, cancel the other one and follow your entry with a 1.89 trailing stop. Tighten the stop to 0.95 once you have a 3.92 gain. RLAY closed Thursday at 23.34. Earnings Report Date: Aug 10, 2022. Beta: 1.44. Market-Cap: 2.536B. Optionable.

TECHNOLOGY SECTOR

Sierra Wireless, Inc. (SWIR: Technology/Communication Equipment) - SQUEEZE PLAY. In certain stocks a tightly constricted price range is a sign that neither bulls nor bears are confident of winning in the near term. This often means that the side that gives up first causes a quick move in the opposite direction. In these fear dominated skirmishes, opposing traders always benefit from the retreat. In the Squeeze Play setup you can actually play both sides of the inevitable surge. SWIR traders reached this state of stand-off on Thursday with the tightest range of the past seven days. You can take advantage of their efforts by placing a low risk BUY trigger at 26.3 and a SELL short trigger at 24.39. After one of the two orders is filled, cancel the un-triggered order and place a trailing stop at 1.91 which can be tightened to 0.96 on a 3 gain. SWIR closed Thursday at 25.68. Earnings Report Date: Aug 10, 2022. Beta: 1.65. Market-Cap: 984.391M. 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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