Notes From The Editor

Last weekend we talked about how to overcome some common obstacles that keep most investors from successfully using "the trend." One of the most common roadblocks is the belief that "the only time the trend is worthwhile is when it is going up." However since the market spends a great deal of time going down as well as up, this widely held opinion often prevents traders from seeing other types of profit opportunities that are easily available.

Accepting the power of the trend only when it is moving up exposes investor's portfolios to serious damage when the trend shifts to moving down. By the time the majority of traders and investors realize that the up-trend is no longer working on their behalf, it's usually too late.

- Now Is The Time

"Time" is perhaps the most misunderstood aspect of the power of trend. Though we are not talking about "timing" here, learning to trade with the trend DOES teach us to recognize market reversals early.

What we're referring to is "time frame," or the specific time period necessary to define a particular trend. For example, the trend on a yearly chart may be headed up, while the trend on a monthly chart may at the same time be headed down. So is the trend up, or is the trend down? It clearly depends on the time frame that we choose to trade.

As simple and easy as this is to comprehend, most references to trend fail to include the specific time frame. This leaves most folks confused. Whenever you hear someone mention "the trend," be sure that they clarify the time frame. This way you will know if the trend they are talking about applies to YOUR personal trading and investment strategy. It's the only trend that matters.

Day traders base their trades on the shortest-term trends. This can be a few hours or even less. Because they are in and out so fast, a one- minute, five-minute, or ten-minute chart is used to determine the trend. On the other hand, traders who prefer to hold positions for a few days might use hourly or daily charts to determine the trend. Longer-term investors will normally use weekly or monthly charts to establish the trend that affects their strategy.

There is no reason for someone who has a two- or three-year time horizon to know what the trend is on a one-minute chart, while at the same time a pure day trader has little interest in the weekly or monthly trend.

Remember that each distinct trend within each time frame is a separate tool to be used for an intended purpose. Different time frames are used for different purposes ... a watchmaker has little need for a sledgehammer, while a drill rig operator in the oilfields uses one every day. In the same sense, trends are tools that help us extract profits from the stock market. Grasping these simple concepts of Time and Trend allows us to choose the best tool for the job!

Trade well,

- Thomas Sutton, Editor

Quick List

    
Stock     06/12     06/12      Buy      Short   Trailing Stops     Gain 
Symbol    Price      +/-      Entry     Entry   Initial/Tighten   Amount 
------  --------  --------  --------  --------  ---------------  --------

MPAA      15.89      0.86     16.38                  1.82/0.91      1.72
RVLV      15.11      0.04     16.70                  2.38/1.19      2.66
NS        15.81      0.45     16.67                  1.64/0.82      1.68
JELD      15.25      0.24     16.55                  2.42/1.21      1.54

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 access to the Risk Calculator, go to http://www.rightline.net and login to the Member's area.

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

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Market Summary

Stocks closed higher on Friday, with the S&P 500 signaling what appears to be a successful bullish test of the 200 Day Simple Moving Average. All three of the major indexes were solidly lower for the week, ending a three-week winning streak. On the economic front, import prices went up in May, and a preliminary read on June consumer sentiment was better than expected. In equities, Lululemon Athletica (LULU $296) fell short of quarterly earnings forecasts, Adobe (ADBE $407) reported mixed results, and Dick's Sporting Goods (DKS $39) reinstated its dividend program. Gold, the USD/dollar and treasury yields were all higher, oil prices finished the session lower.

                      Friday                 On The Week      
                  --------------------   --------------------
Dow                    25,606  +477.37        -1505    -5.55%
Nasdaq                  9,589   +96.08      -225.08    -2.29%
S&P 500                 3,041   +39.21         -153    -4.79%

NYSE Volume                      5.85B                       
NYSE Advancers                    2335                       
NYSE Decliners                     652                       

Nasdaq Volume                    4.38B                       
Nasdaq Advancers                  2486                       
Nasdaq Decliners                   831                       

                                 New Highs/Lows

                   06/05  06/08  06/09  06/10  06/11  06/12
                 --------------------------------------------
NYSE New Highs        64     57     36     40      8     12
NYSE New Lows          0      4      3      1      4      2
Nasdaq New Highs     119    128     88    142     25     24
Nasdaq New Lows        8      4      5      5     11      7
   

TRADER'S TIP: "Hey, That Stop Is Too Big. . ."

It's common for traders to think that a particular stop - say $5 or $10 - is "too big." While the size of a stop usually gets the most attention, the amount of money at risk is actually far more important. Just remember that a "big" stop doesn't equal big risk when your position size is small. To determine the correct number of shares to keep risk low, always plan your trade using the RightLine Risk Control Calculator.

The Technical Analyst

For help with this chart, be sure to read "Understanding The Importance Of Support And Resistance"
and "Boost Your Profits With Moving Averages".

S&P 500 - 3041.31 June 12, 2020

52-Week High: 3393.52
52-Week Low: 2191.86
Daily Trend: DOWN
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 3583.62
Resistance 2: 3334.96
Resistance 1: 3188.13
Pivot: 3086.30
Support 1: 2939.47
Support 2: 2837.64
Support 3: 2588.98


NASDAQ Composite - 9588.81 June 12, 2020

52-Week High: 10086.89
52-Week Low: 6631.42
Daily Trend: DOWN
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 11042.97
Resistance 2: 10369.70
Resistance 1: 9979.26
Pivot: 9696.44
Support 1: 9305.99
Support 2: 9023.17
Support 3: 8349.90
        
Dow Industrials - 25605.54 June 12, 2020

52-Week High: 29568.57
52-Week Low: 18213.65
Daily Trend: DOWN
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 31091.65
Resistance 2: 28589.85
Resistance 1: 27097.69
Pivot: 26088.05
Support 1: 24595.89
Support 2: 23586.25
Support 3: 21084.45
 

Market Calendar

ECONOMIC REPORTS AND EVENTS (all times are Eastern):    

Monday, June 15, 2020:
15-Jun  8:30 am   Empire State index

Tuesday, June 16, 2020:
16-Jun  8:30 am   Retail sales
16-Jun  8:30 am   Retail sales ex-autos
16-Jun  9:15 am   Industrial production
16-Jun  9:15 am   Capacity utilization
16-Jun  10 am   Home builders' index
16-Jun  10 am   Business inventories

Wednesday, June 17, 2020:
17-Jun  8:30 am   Housing starts (annual rate)
17-Jun  8:30 am   Building permits (annual rate)

Thursday, June 18, 2020:
18-Jun  8:30 am   Initial jobless claims (regular state program)
18-Jun  8:30 am   Initial jobless claims (total, NSA)
18-Jun  8:30 am   Philly Fed manufacturing index
18-Jun  10 am   Leading economic indicators

Friday, June 19, 2020:
19-Jun  8:30 am   Current account deficit

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

TRADER'S TIP: "Switching Emotions"

Most of us are motivated by a variety of emotions that can be roughly grouped under two headings - hope and fear. For example, when the average investor is caught in a losing position, they usually do nothing other than hope that each day will be the last that the stock goes down. As a result, they end up losing more than if they had not "hoped" as much. On the other hand, when someone holds a winning position, they usually become fearful that the next session will take away their profits, so they get out the trade too soon. In effect, fear keeps them from making as much as they should.

Successful traders know how to reverse their emotions in these circumstances - to use fear when most people would hope, and use hope when most people would fear. It's much more profitable to fear that our losses will grow bigger, and hope that our profits will grow bigger. Research shows that this lesson can be difficult to accept, because it goes against human nature and is the complete opposite of what most people would do. However uncomfortable it may feel when you first attempt it, this simple reversal of emotions during normal trading situations is a valuable "brain tool" that will help you make wise decisions - sell losing positions and hold on to winners!

Stocks Covered in This Issue

CONSUMER CYCLICAL SECTOR

Motorcar Parts of America, Inc. (MPAA: Consumer Cyclical/Auto Parts) - BULLISH BOUNCE. The charts for MPAA show that despite the downward pressure from sellers recently, the weekly uptrend is still going strong. Buyers showed up again on Friday, resulting in the early stages of a rebound that started near moving average support. The resulting Bullish Bounce set-up offers a potential entry point for a long play. Set your trigger to BUY shares at 16.38, and follow your entry with a trailing stop of 1.82. Tighten it to 0.91 when a 1.72 profit is reached. MPAA ended the latest session at 15.89. Earnings Report Date: Jun 15, 2020. Beta: 1.60. Market-Cap: 301.354M. Optionable.

Revolve Group, Inc. (RVLV: Consumer Cyclical/Internet Retail) - BULLISH BOUNCE. Looking a bit frayed after sliding downhill in recent sessions, on Friday RVLV seemed intent on initiating a rebound. With moving average support nearby, RVLV is at a logical place for Bulls to regroup and extend the familiar uptrend that shareholders have become accustomed to. On continued buying, plan on taking long entries with a BUY at 16.70. Manage risk with a 2.38 stop. Tighten your stop to 1.19 when you have a 2.66 profit. RVLV ended the day at 15.11. Earnings Report Date: N/A. Beta: N/A. Market-Cap: 1.048B. Optionable.

ENERGY SECTOR

NuStar Energy L.P. (NS: Energy/Oil & Gas Midstream) - 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 Friday's session to close at 15.81. Anticipate the rebound to continue, and be ready to buy NS at 16.67. Follow your entry with a trailing stop of 1.64 which can be tightened to 0.82 on a 1.68 profit. Earnings Report Date: Aug 06, 2020. Beta: 2.55. Market-Cap: 1.726B. Optionable.

INDUSTRIALS SECTOR

JELD-WEN Holding, Inc. (JELD: Industrials/Building Products & Equipment) - BULLISH BOUNCE. JELD's positive weekly uptrend is still intact despite recent selling that has driven share prices lower. Price action on Friday shows that traders are aware of the moving average support zone now in play, and they are ready to consider buying again. A shift up from this point will attract even more buyers. The new buying should move JELD back in step with the bullish weekly trend, so our BUY entry trigger is set at 16.55. Once you hold a position, trail a stop of 2.42. Tighten it to 1.21 on a 1.54 gain. JELD closed at 15.25 on Friday. Earnings Report Date: N/A. Beta: 2.82. Market-Cap: 1.532B. 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  
---------------- -------     --------    -------     ------  -------   

Currently there are no upcoming stock splits on the major US exchanges.
    

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

"How Important Is A High Percentage of Winners?"

I sometimes see advertisements for trading services that proudly proclaim an ultra-high percentage of winners. These ads remind me of my early trading days. Like most rookies, I thought that a high percentage of wins was necessary to be successful. A lot of water has flowed under the trading bridge since then. I've learned that things aren't always as they seem - especially in the stock market!

Here's an example of what I mean - pretend for a minute that we're at the local county fair. As we walk down the fairway there are two games of chance side by side. The guy at the first booth leans over the counter and says, "Give it a try - a dollar a play, four out of 10 winners every time!"

At the next booth the fellow behind the counter shouts, "Step right up - a buck a play, six out of 10 winners guaranteed." Assuming that we're there to have fun (and make a little money if we get lucky), which game should we play?

At first glance it looks simple. Both games cost the same per play, but one has a higher percentage of winners. Of course we would take the six-out-of-ten game over the four-out-of-ten-game. But what if we took a step closer and found that the lower odds game paid out $4 for each winner, but the second game paid only $2. How would that affect our choice?

Now lets do the math. The first game costs $10 for ten plays, with four winners at $4 each. That's 4 times $4, or $16 in winnings. Subtract the $10 to play and we're left with $6 profit. The second game costs the same to play, but we end up with six winners. That's 6 times the $2 payoff for each winner, or $12 total minus the $10 to play leaves us with $2.

It's clear in this case that the lower percentage game pays off the most because each winner is twice the amount as in game two. In other words, the same amount invested in a lower percentage game produced three times the profits because the payoff per winner is higher.

It's obvious in this example that the higher reward to risk ratio in the first game was a very important component in the profitability of the game. That exact same aspect is true in trading stocks. While our intuition may tell us that a trading method with a very high percentage of winners is always "better," logic indicates otherwise. Not only should we consider the percentage of winners when deciding which strategy to use, but we should also consider the reward to risk ratio.

All things being equal, a high percentage approach will produce higher profits. However, there is a severe penalty for pushing too hard toward a high percentage of wins. The unpredictable and relatively efficient nature of the stock market insures that traders who follow this approach will be forced into two very damaging situations - smaller profits and larger losses.

To maintain the high number of winners, traders are forced to limit the reward for each trade and take quick profits. Strategies that depend on small profits are capable of high winning percentages, yet to achieve this high win-to-loss ratio they also have to take on more risk per trade.

If they limit the amount of risk or loss per trade, the percentage of winners drops too. A study of different trading systems by Keener Capital Management show that higher winning percentages are characteristic of the worst performing strategies. By contrast, strategies with lower winning percentages were the most profitable.

In summary, a high percentage of wins don't necessarily mean more profit. Robust trading strategies require risk control tactics that include reasonable stop placement.

Instead of trying to maintain a very high win-to-loss ratio, traders will benefit more by focusing on trade management to arrive at a profitable balance between risk and reward. A simple yet extremely effective guideline is to:

- Limit losses to reasonable amounts

- Use trailing stops to lock in accumulating profits

- Let the winners grow!

A simple yet powerful tool, the Risk Control Calculator helps you manage risk by recommending a maximum number of shares to purchase. Available to all RightLine subscribers. For access, go to http://www.rightline.net and login to the Member's area.

Disclaimer

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