March 16, 2024 - The RightLine Report
Notes From The Editor
What's been occupying your thoughts lately? While many people fixate on money, it's often wiser to shift your focus away from cash, especially when trading. Instead of fixating on potential profits during a trade, prioritize making smart decisions.
Each time you enter or exit a trade, you're making a choice. Each decision presents an opportunity for growth, if you give your experiences the value they deserve. Conversely, if you label your experiences as "mistakes" and excessively criticize yourself for not always making "perfect" choices, your confidence and trading account will suffer.
Attitude is crucial because it influences everything. It stems from beliefs, which dictate actions. Beliefs act like either binoculars, helping us spot opportunities, or blindfolds, preventing us from seeing them altogether.
Trading circumstances are rarely ideal, so decisions are often made under less-than-optimal conditions. Therefore, it's important to avoid self-criticism while still taking full responsibility for your actions.
You're the sole arbiter of the value of each trading experience you encounter. How much do you value yours? Many people tend to underestimate the significance of personal experiences. Ensure you rate yours highly.
Strengthen your beliefs and boost your self-esteem by considering every trading experience valuable. Money is a byproduct of wise decisions, so concentrate on trading intelligently, and financial gains will follow.
Wishing you successful trading,
Thomas Sutton, Editor
Stocks Covered Today Stock Splits Trader's Corner
Quick List
Stock 03/15 03/15 Buy Short Trailing Stops Gain
Symbol Price +/- Entry Entry Initial/Tighten Amount
------ -------- -------- -------- -------- --------------- --------
FL 22.48 -0.43 23.16 21.60 1.56/0.78 2.64
NAMS 22.03 0.10 22.34 20.61 1.73/0.87 3.60
FLYW 25.60 0.13 26.01 1.66/0.83 2.14
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.
Stocks Covered Today Stock Splits Trader's Corner
Market Summary
Equity markets closed mostly down on Friday, with the S&P 500 declining by nearly 0.7% and the tech-heavy NASDAQ dropping about 1%. However, small-cap stocks bucked the trend, with the Russell 2000 Index gaining around 0.4%.
Sector-wise, information technology, communication services, and consumer discretionary sectors all lagged, each experiencing declines of over 1%. Adobe, a software company, saw its shares plummet by over 13% following disappointing earnings guidance issued after yesterday's market close, despite reporting earnings and sales that beat expectations.
Overseas, both Asian and European markets showed mixed performance ahead of upcoming central bank meetings from the Bank of Japan and Bank of England. Treasury yields edged up slightly, with the 10-year yield ending just above 4.3% and the 2-year yield closing around 4.74%.
Monetary policy will take center stage next week, with market attention turning to central bank policy rate decisions, particularly the FOMC meeting scheduled for Wednesday. Market expectations are for the Fed to maintain rates at 5.25% - 5.50%.* Initially, there were expectations for about six 0.25% rate cuts from the Fed in 2024. However, recent CPI readings above expectations have tempered this outlook, with futures markets now pricing in about three 0.25% Fed rate cuts in 2024, with the first cut anticipated at the June meeting. Despite these CPI readings, the overall trend in inflation remains downward, and there is still a possibility that the Fed could begin cutting rates by the June meeting.
Year-to-date sector leadership has resembled that of 2023, with information technology and communication services leading the S&P 500. These sectors have been supported by strong earnings growth and optimism surrounding artificial intelligence (AI). However, there has been a broadening of leadership in the past month, with cyclical and value sectors outperforming the growth-oriented technology and communication services sectors. Energy and materials have been the top-performing sectors over the past month, each rising by over 9%. Additionally, utilities and financials have seen strong performance, both rising by over 4% in the past month. This contrasts with a roughly 3% return from technology and a 0.7% return from communication services. Furthermore, the Russell 1000 Value Index has outpaced the Russell 1000 Growth Index, rising by 4.2% compared to a 2% gain for the latter.
Looking ahead, we anticipate that the trend of broadening leadership may continue in 2024, with last year's underperformers, such as value-style investments and small- and mid-cap stocks, potentially making gains.
Friday On The Week
-------------------- --------------------
Dow 38,714.77 -190.89 -45.72 -0.12%
Nasdaq 15,973.17 -155.36 -111.94 -0.7%
S&P 500 5,117.09 -33.39 -12.48 -0.24%
NYSE Volume 8.09B
NYSE Advancers 1,553
NYSE Decliners 1,246
Nasdaq Volume 8.43B
Nasdaq Advancers 2,236
Nasdaq Decliners 2,009
New Highs/Lows
03/08 03/11 03/12 03/13 03/14 03/15
--------------------------------------------
NYSE New Highs 288 127 180 282 138 106
NYSE New Lows 15 19 25 23 59 53
Nasdaq New Highs 354 103 131 189 95 84
Nasdaq New Lows 83 88 125 121 196 140
Stocks Covered Today Stock Splits Trader's Corner
TRADER'S TIP: "Always Check the ADX When Using the RSI"
Many traders use the Relative Strength Indicator (RSI) level as a filter for entries, and will not place a new buy order if the RSI indicates an overbought condition. In many cases this is an effective entry filter that prevents buying just before the market reverses. However, in a lot of cases this would be a major mistake.
Always look to the ADX line - Average Directional Movement - to see if it is rising. Some of the best entry signals come when the RSI is high and the ADX is rising. Depending on the chart program you use, the ADX is usually either a stand-alone indicator, or part of the Directional Movement Index (DMI).
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".
Stocks Covered Today Stock Splits Trader's Corner
Market Calendar
ECONOMIC REPORTS AND EVENTS (all times are Eastern): MONDAY, MARCH 18 10:00 am Home builder confidence index TUESDAY, MARCH 19 8:30 am Housing starts Feb 8:30 am Building permits Feb WEDNESDAY, MARCH 20 2:00 pm FOMC interest-rate decision 2:30 pm Fed Chair Powell press conference THURSDAY, MARCH 21 8:30 am Initial jobless claims 8:30 am Philadelphia Fed manufacturing survey 9:45 am S&P flash U.S. services PMI 9:45 am S&P flash U.S. manufacturing PMI 10:00 am U.S. leading economic indicators 10:00 am Existing home sales FRIDAY, MARCH 22 None scheduled For a chart of typical Up or Down market reactions to specific major US economic reports go to: Economic Indicator Effects
Stocks Covered Today Stock Splits Trader's Corner
TRADER'S TIP: "How Do You Get To Carnegie Hall?"
We've all heard the answer to this old joke . . . "practice, practice, practice!" While it is certainly obvious that trading successfully requires plenty of it, many investors have yet to apply this ancient bit of oriental wisdom: "Practice is the best of all instructors."
Stocks Covered in This Issue
CONSUMER CYCLICAL SECTOR
Foot Locker, Inc. (FL: Consumer Cyclical/Apparel Retail) - SQUEEZE PLAY. The struggle between buyers and sellers has resulted in FL'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 23.16 and a SELL order at 21.6. Regardless of which order is triggered, cancel the other one and follow your entry with a 1.56 trailing stop. Tighten the stop to 0.78 once you have a 2.64 gain. FL closed Friday at 22.48. Earnings Report Date: May 17, 2024. Beta: 1.43. Market-Cap: 2.117B. Optionable.
HEALTHCARE SECTOR
NewAmsterdam Pharma Company N.V. (NAMS: Healthcare/Biotechnology) - SQUEEZE PLAY. Trader indecision has put NAMS 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 22.34 and a SELL short entry at 20.61. Now it's up to NAMS to show us which entry will be filled. Once the trade is underway place a 1.73 trailing stop, which can be tightened to 0.87 after you achieve a 3.6 profit. NAMS closed on Friday at 22.03. Earnings Report Date: N/A. Beta: 0.02. Market-Cap: 1.967B. Not Optionable.
TECHNOLOGY SECTOR
Flywire Corporation (FLYW: Technology/Software - Infrastructure) - BULLISH BOUNCE. Up-trending stocks like FLYW 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 Friday, FLYW is poised to lift off again. To take advantage of this setup, prepare to BUY shares at 26.01 if positive price action occurs. As always, follow your entry with a trailing stop. A 1.66 trailer should work well with FLYW. Tighten it to 0.83 on a 2.14 gainer. Earnings Report Date: N/A. Beta: 1.06. Market-Cap: 3.144B. 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.
Stocks Covered Today Stock Splits Trader's Corner
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
---------------- ------- -------- ------- ------ -------
NOTE: The number of stock split announcments goes up during Bull markets,
and goes down during Bear market cycles. There are currently no upcoming
stock splits that meet RightLine's proprietary criteria for split ratio,
trading volume and price action.
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.
Stocks Covered Today Stock Splits Trader's Corner
Trader's Corner
Stop Loss Questions And Answers - Part I
I get more questions about stop losses than about any other subject. Clearly this strategy causes traders a lot of pain and confusion. Some of it stems from the schizoid nature of our modern markets. But most of it reflects an underlying weakness in trade management skills.
What takes place at the end of a trade usually reflects decisions made at the beginning. In other words, the best entries usually lead to the most profitable exits. This is the most urgent wisdom I can give when it comes to stop-loss placement.
We can spend hours deciding whether a stock is a good buy or a good sell, but this emphasis is often misplaced. Over time, carefully chosen exits are more important than great entries. You don't believe me? Just ask all those folks who bought tech stocks in the late 1990s.
I've compiled a question-and-answer session that addresses the most important elements of stop-loss strategy.
Question: Where do I place my stop loss when shorting a stock that gaps down?
Answer: The most obvious place is just above the price level where the gap would be filled. But that's a generic answer. It's more effective to place the stop loss on top of converging resistance, such as highs, Fibonacci retracements and moving averages. A bouncing stock will have a very hard time getting through those levels.
Q: I'm getting stopped out of both my longs and my shorts in this market. Are my stops too tight, or should I blame it in the choppy market?
A: There are many reasons why stops get hit too often. It's hard to tell without knowing the specifics of each placement. This is a tough market, and you often have only two choices. First, place a tight stop loss and trade the small swings to avoid all the choppy reversals. Second, back up a giant step and trade the broader trend you see in front of your nose. In other words, the market is only choppy if you're a daytrader or if you flip positions every few days.
The trends are more obvious if your holding period is weeks or longer. But longer holds have a disadvantage when it comes to stop placement. You have to take on greater risk with longer-term positions, because stocks will wiggle around a lot more before getting from point A to point B.
There's one more caution in regard to stop placement. Your stops have to match your trading strategy. For example, if you're looking for a 3- point swing, you have to stay out of the market until your risk (current price to stop price) is a point or less. This goes back to the importance of picking good entry points.
Q: My stops get hit all the time. What am I doing wrong?
A: Keep those stops away from the most obvious support or resistance levels, such as round numbers. There's a lot to gain by pushing price through these levels. It cleans out one side of the market and sets up a vacuum headed the other way. It's one reason I'll actually sell short into a breakout or go long into a breakdown. Keep in mind that many traders look for price stretching through a barrier as a signal to go the other way.
Q: Should I use a flat dollar or percentage stop loss?
A: I never use percentage or dollar stop losses, at least for the initial placement. The first stop loss is always based on the price pattern and where current action violates the trade setup. Of course, you need good trailing stops once a position moves in your favor, and flat dollar strategies have a useful purpose in protecting profits. But I would avoid percentage stop losses in all cases.
A move of 5%, 10% or 50% says nothing about the current market or trade setup. You could enter a position where a stock moves 11% every day on average. So your 10% stop is at risk every day because of market noise, rather than anything else. A percentage stop loss gives the illusion of controlling risk without giving you the realization of what risk is in the first place. Why is this important? Reward and risk are joined at the hip. If you don't have one right, the other won't be right either.
There is a definable risk based on the pattern and where you enter the trade. Each trade has a different risk profile, and your trade entry tells you how much it can wiggle but still get you to the goal. You need to include this standard deviation in your stop-loss planning, or you'll take maximum loss after maximum loss.
Q: I'm thinking about using time-based stops instead of price-based stops. Do they work?
A: Time-based stops may work, but time cycles are 10 times harder to manage properly than price. So your chances of being wrong with time stops are about 10 times as great. You'll also experience major drawdowns while you wait for your time to get hit.
Q: How can I protect my positions from gaps and sudden price moves? Sometimes they happen before I have a chance to set my stop losses.
A: Plan a fire drill and practice it in your head at all times. The fire drill is a consideration for the worst-case scenario. Of course, we protect positions with stops whenever we can. But things such as gaps and world events can carry positions through them, and we need to know exactly what to do when the market spikes. The only way to accomplish this is to visualize it happening and to see how you really want to address it. Then you'll act spontaneously when the time comes.
If a stock is set to gap through your stop loss when it opens, do you sell it immediately or wait for a bounce? There's really no right answer. I usually pull my stop and watch the first few minutes of trading. If the market reverses, I try to close out on the bounce to a common retracement level.
Some midday panic situations are global, while others are sudden. Most times, my preferred fire drill is to exit first and ask questions later. Sometimes I'll see the futures go crazy and not know why. They may not affect my individual positions at the time, but I'll often exit everything until I can find out what happened. I still remember the futures going crazy on Sept. 11, 2001. There was only a few minutes to jump ship before the market was shut down for days.
Q: I'm placing very tight stops on every trade, but they keep getting hit. What am I doing wrong?
A: Base your stops on the risk profile of the stock you're trading. You can't trade a volatile biotech stock and expect to get away with a 15- cent stop loss. But you might be able to do it with a slow moving REIT or paper company. Look at total dollar exposure and the stock's volatility. Be focused on exiting when you're wrong, wherever that is on the price chart. The only way that makes sense with your stop loss is if your entry was appropriate to the trade setup. You can also take another shot at a stock if your stop loss gets hit or the stock recovers. These new positions should move in your favor immediately, or you should jump ship again because you were already wrong once.
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This guest article was written by Alan Farley, author of "The Master Swing Trader." Be sure to read "Stop Loss Questions And Answers - Part II" in the next weekend issue of the RightLine Report.
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
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