Notes From The Editor

It's often said that "the trend is your friend." On a rational level most of us understand the market wisdom beneath the question. However, few traders actually know how to turn this popular proverb into cold hard cash. To help move the troops further along the trail of trading enlightenment, let's indulge in a quick review of "Trend Trading 101."

In essence, the trend is the general direction that stock prices are moving. This movement can be compared to the current in a river, where we all know that swimming along with the flow is relatively easy, while trying to swim against it requires much more effort and takes longer to get anywhere.

The overall stock market price trend exerts powerful forces on individual stocks. Hoping that a stock will go higher when the trend is down is like trying to swim upstream against the current.

Before diving into a river, most swimmers would first stop to check the current. Using the same sort of caution gives informed traders a huge advantage over the majority who typically leap before they look. It pays to determine which direction the trend is headed before diving into a stock purchase.

Most people can easily understand this concept yet find it extremely difficult to apply to the stock market. To find out why, let's take a look at the first of three dominant reasons why only a small minority of traders and investors truly understand what it means to be friends with the trend.

It's All In Your Head ... This one is purely psychological. I'm talking about the common prejudice that most of us have against a declining market. How could we possibly become friends with a "downtrend"? After all, when stocks go down everybody loses money. We all KNOW that a "bad" market is our enemy ... Right?

Time for a paradigm shift. There's no such thing as a "bad market." In other words, every trend is our friend when we choose to accept it. There's no reason to fight against a market downtrend. It's bigger and stronger than any of us. Remember swimming in the current of river? In the same way both up AND down trends can be used as powerful forces to make money in stocks.

The insight gained from shifting to an unbiased market perspective allows us to recognize which trend is in control and then flow with it. This isn't rocket science. It doesn't take long to learn and isn't really that hard to do. But even if it were, we'd do it anyway, because the benefits are enormous.

Don't expect the larger crowd to understand. The stock market game requires that there be plenty of uniformed players on the field that are willing to give their investment capital away - even if they don't realize it! They have accepted the idea that any downtrend is their enemy, and by doing so contribute unknowingly to the opposing team.

They usually hold onto losing positions, watch their portfolio values drop, and hope that the problem will just go away. Instead of limiting their losses with a pre-planned exit strategy that gets them out early, they hang on to the losers until serious damage is inflicted on their capital.

Fortunately, no one has to be a part of this crowd if they choose to drop the prejudices, and learn to make both up AND down trends their friends.

That's it for now. In next weekend's RightLine Report we'll take a closer look at the skills we all need to flow with the trend, AND one of the most important reasons for the trend to become your friend - Time!

Trade well, and have a great week!

- Thomas Sutton, Editor

Quick List

    
Stock     06/05     06/05      Buy      Short   Trailing Stops     Gain 
Symbol    Price      +/-      Entry     Entry   Initial/Tighten   Amount 
------  --------  --------  --------  --------  ---------------  --------

FTDR      44.63      1.31     46.23                  3.76/1.88      3.56
BHB       21.49      1.06     22.06     20.57        1.49/0.74      2.54
DOCU     139.64     -0.42    146.85                 19.52/9.76     11.62
MTLS      25.84     -0.49     27.09                  2.82/1.41      2.16

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 rallied on Friday for the third straight weekly gain, as traders remain optimistic on global economic reopenings, the continued flood of monetary stimulus, and positive developments from the Health Care sector looking for a solution to the COVID-19 virus. Several global manufacturing and services sector reports show May output has improved from the prior month, and Friday's jobs report recording an unexpected major improvement in the number of people employed. Equities headlines included mixed quarterly earnings results and lukewarm guidance from Broadcom, while DocuSign provided positive profit news and guidance. Oil prices, treasury yields and the USD/dollar all climbed higher, gold finished the session lower.

                      Friday                 On The Week      
                  --------------------   --------------------
Dow                    27,111  +829.16        +1728     6.81%
Nasdaq               9,814.08  +198.27      +324.21     3.42%
S&P 500                 3,194   +81.58         +150     4.93%

NYSE Volume                      8.68B                       
NYSE Advancers                    2531                       
NYSE Decliners                     450                       

Nasdaq Volume                    6.56B                       
Nasdaq Advancers                  2495                       
Nasdaq Decliners                   817                       

                                 New Highs/Lows

                   05/29  06/01  06/02  06/03  06/04  06/05
                 --------------------------------------------
NYSE New Highs        28     50     56     71     41     64
NYSE New Lows         13      5      4      2      3      0
Nasdaq New Highs      82    133    104    122     72    119
Nasdaq New Lows       18      9      8      8     13      8
   

TRADER'S TIP: "Stocks, Motion, and Consolidation"

As Newton's Theory describes, an object in motion tends to remain in motion. In a similar fashion, once a trend is underway, it usually remains in motion with periodic periods of rest and consolidation. This is the reason that stocks generally leave a period of consolidation in the same direction that they entered it. Unless evidence based on chart action indicates otherwise, it is usually a good idea to trade in the direction of a stock prior to its entry into consolidation.

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 - 3193.93 June 5, 2020

52-Week High: 3393.52
52-Week Low: 2191.86
Daily Trend: UP
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 3506.08
Resistance 2: 3325.91
Resistance 1: 3259.92
Pivot: 3145.73
Support 1: 3079.74
Support 2: 2965.55
Support 3: 2785.37


NASDAQ Composite - 9814.08 June 5, 2020

52-Week High: 9845.69
52-Week Low: 6631.42
Daily Trend: UP
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 10474.10
Resistance 2: 10090.73
Resistance 1: 9952.40
Pivot: 9707.36
Support 1: 9569.03
Support 2: 9323.99
Support 3: 8940.62
        
Dow Industrials - 27110.98 June 5, 2020

52-Week High: 29568.57
52-Week Low: 18213.65
Daily Trend: UP
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 30791.92
Resistance 2: 28674.28
Resistance 1: 27892.63
Pivot: 26556.64
Support 1: 25774.99
Support 2: 24439.00
Support 3: 22321.36
 

Market Calendar

ECONOMIC REPORTS AND EVENTS (all times are Eastern):    

Monday, June 08, 2020:
08-Jun          None scheduled

Tuesday, June 09, 2020:
09-Jun   6 am   NFIB small-business index
09-Jun  10 am   Job openings
09-Jun  10 am   Wholesale inventories

Wednesday, June 10, 2020:
10-Jun  8:30 am   Consumer price index
10-Jun  8:30 am   Core CPI
10-Jun   2 pm   Federal budget
10-Jun   2 pm   FOMC announcement
10-Jun  2:30 pm   Jerome Powell press conference

Thursday, June 11, 2020:
11-Jun  8:30 am   Initial jobless claims (regular state program, SA)
11-Jun  8:30 am   Initial jobless claims (total, not seasonally adjusted)
11-Jun  8:30 am   Producer price index
11-Jun  10 am   Quarterly services survey

Friday, June 12, 2020:
12-Jun  8:30 am   Import price index
12-Jun  10 am   Consumer sentiment index

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

TRADER'S TIP: "When's The Next Flight To Vegas?"

Many traders are just gamblers - they throw money at the market with no real plan or method. Sometimes they win big, and sometimes they lose big, but ultimately they lose it all. Technical analysis and risk control gives us an edge that can be used within a disciplined routine to avoid the gambler's trap. There's no need for gambling or impulsive trading when your decision-making process is based on specific rules.

Stocks Covered in This Issue

CONSUMER CYCLICAL SECTOR

frontdoor, inc. (FTDR: Consumer Cyclical/Personal Services) - BULLISH BOUNCE. Some people hear of a stock that's performing nicely and then buy it without any regard for timing the entry. This approach usually leaves money on the table, money that could just as well be added to profits. The Bullish Bounce setup provides a well timed entry and reduces exposure to risk by placing both the entry trigger and exit stop near the bottom of the bounce. We have an opportunity to use this approach with FTDR which met our setup criteria on Friday. The BUY trigger for this trade is at 46.23, and the trailing stop is sized at 3.76. Resize the stop to 1.88 upon collecting a 3.56 point gain. FTDR closed Friday at 44.63. Earnings Report Date: Aug 05, 2020. Beta: N/A. Market-Cap: 3.811B. Optionable.

FINANCIAL SERVICES SECTOR

Bar Harbor Bankshares (BHB: Financial Services/Banks-Regional) - SQUEEZE PLAY. BHB shareholders know what it feels like to be squeezed. Friday'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. BHB closed Friday at 21.49. The plan is to enter in the right direction by placing a BUY trigger at 22.06 and a SELL short trigger at 20.57. Once BHB establishes direction, place your triggered order. As soon as you are in the trade, place a trailing stop in the amount of 1.49. After you've collected a 2.54 profit, tighten the stop to 0.74. Earnings Report Date: N/A. Beta: 1.01. Market-Cap: 333.819M. Not Optionable.

TECHNOLOGY SECTOR

DocuSign, Inc. (DOCU: Technology/Software-Application) - NEW HIGH DIP. You know a stock is performing well when it sets a new 52-week high. Such is the case with DOCU, which recently entered new-high territory before dipping lower the past few sessions. A rebound from Moving Average support on Friday indicates DOCU may be ready to resume its upward climb. Now sitting at 139.64, a move to 146.85 will trigger a BUY entry. Place a 19.52 trailing stop after entering and tighten it to 9.76 once you've gained 11.62. Earnings Report Date: Sep 03, 2020. Beta: N/A. Market-Cap: 25.572B. Optionable.

Materialise NV (MTLS: Technology/Software-Application) - BULLISH BOUNCE. Everyone familiar with price charts knows that a stock tends to bounce its way higher rather than move in a straight line. The lower levels of these short-term rebounds offer a safe and often early entry into stocks that are in the process of establishing longer-term uptrends. MTLS's reaction to support on Friday created a Bullish Bounce setup with a BUY entry trigger at 27.09. Use a 2.82 trailing stop, which should work well with MTLS's typical daily range. Tighten it to 1.41 on a 2.16 profit. MTLS closed at 25.84 on Friday. Earnings Report Date: Aug 04, 2020. Beta: 0.44. Market-Cap: 1.374B. Not 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

"Market Liquidity and Fund Flows"

You may remember from high school economics that business operates on the basic principle of "supply and demand." If there is a lot of demand for a limited amount of supply, prices will go higher, if there is more supply than demand, than prices will go lower. In the stock market, the principle works the same way. If there are more people who want to buy (demand) than there are people who want to sell (supply) prices will head higher, and visa versa.

Successfully forecasting short-term supply/demand for stocks can improve our odds as traders, but is it possible to do it? To find out, let's take a look at the providers of mutual fund flows and liquidity numbers to see how they can be helpful to traders.

- Who Provides the Mutual Fund Flow Data?

There are three premier companies that specialize in tracking flows in and out of mutual funds: Trim Tabs, AMG Data (Lipper), and the Investment Company Institute. Even though each company provides its own specific interpretation of the data, they all understand how important these flows are to the market.

At RightLine, we primarily use the TrimTabs reports. Trim Tabs Fund Flows report attempts to reliably forecast the Investment Company Institute's results by taking a sampling of approximately 850 statistically significant funds. The ICI numbers are more comprehensive, but are not always released as quickly as Trim Tabs.

- Trim Tabs

Trim Tabs is the only independent research service that publishes daily and weekly in-depth coverage of stock market liquidity going back to 1990. Charles Biderman, a former Barron's Financial Weekly editor, is the originator of the "Liquidity Theory". This view is based on the premise that the total market capitalization - price - is a function of liquidity, and has nothing to do with value.

The Mutual Fund Flows provided by TrimTabs is very popular with the media, but the Liquidity Report really gives a much broader picture of how money is shifting in and out of the market. TrimTabs considers liquidity a "coincident indicator" to stock prices. In other words, if we know where liquidity is heading, then we'll know where stock prices are heading at the same time.

The "Mutual Fund Flows" are the net amount of money either going in or out of mutual funds. Trim Tabs surveys over 850 equity and bond funds daily to calculate this figure. The flows are categorized as follows:

~ Total Equity Funds are made up of US Equity funds and International funds.

~ The US Equity funds include "Aggressive Growth", "Growth", and "Growth and Income" funds.

~ The Total Bond funds include Hybrid (stock and bond) funds, Government and GNMA bonds, Municipal Bonds, Corporate/Income/Global bond funds, and High Yield funds.

If US Equity funds show a significant inflow, the individual fund managers scramble to put the money to work in the market by buying stock. On the other hand, if there are major outflows from mutual funds, the fund managers liquidate stock to fulfill redemption requests from fund shareholders.

- Trim Tabs Liquidity Calculation

Liquidity is the difference between inflows and outflows of cash in the stock market over a given period of time. Trim Tabs calculates liquidity by adding US Equity Fund Inflows, two-thirds of newly announced cash takeovers, one-third of completed cash takeovers and subtracting new offerings.

Cash takeovers of publicly traded companies are considered a new inflow of cash into the market. On the other hand, new offerings (IPOs) are considered a drain on liquidity because they "use" money that would have been available for investing in the "previously-existing" stocks.

Liquidity tends to run higher during tax refund season and year-end bonus time, and lower near dates when people and companies have to pay their taxes.

The Trim Tabs website can be seen at http://www.trimtabs.com/.

- Investment Company Institute

The Investment Company Institute gets its data from ICI members, which represent 95 percent of the total investment company industry's assets.

The ICI web site shows similar information as the Trim Tabs Fund Flows, but as mentioned above, it covers a wider number of sources and isn't released as quickly.

ICI reports the assets of money market funds to the Federal Reserve Board each week and makes this data available to the public on a weekly basis. The Institute also reports monthly on three broad categories of funds. They are:

(1) Short-term funds which include tax-exempt money market funds;

(2) Taxable retail and institutional money market funds; and

(3) All funds other than money market funds - such as stock, income, corporate bond and municipal bond funds.

For more information you can visit ICI's website at: http://www.ici.org/new/index.html.

- AMG Data (Lipper)

AMG Data (Lipper) is another respected company that provides mutual fund flow information. They offer weekly aggregate and fund specific Money Flow reports on just about any sector. They maintain an archive of historical fund flow reports and year-end statistical data dating back to 1992 on all AMG sectors.

AMG collects and reports the numbers for all fund groups as soon as each company releases data. Vanguard, Fidelity, and American Funds report month-end numbers early the following month. Information on weekly reporting funds is for each week ended Wednesday. Monthly flows are calculated by combining weekly reported flows and monthly reported flows for each month.

AMG's "Cash Track" describes the rate at which money is coming into or going out of a sector. Most funds report weekly, and some report monthly, so AMG uses a 4-week moving average across the entire set of funds, even those that report less often. Weekly reporting funds include 93% of the share classes, which represent 75% of the total fund assets.

The AMG Data (Lipper) Services website is at http://www.lipperusfundflows.com.

Bottom Line: In conclusion, market liquidity and fund flow reports have historically been a timely indicator of investor sentiment and current demand. While liquidity and fund flows aren't something you would necessarily consider before each trade, this information can give you valuable insight into the market's current supply and demand situation.

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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