March 5, 2020 - The RightLine Report
Notes From The Editor
Average True Range - Revisited
We recently talked about the value of using a stock's average true range (ATR) to factor in changes in volatility - particularly when it comes to placing stops. You'll recall that a good starting point is to double the ADR and use that as an initial stop. But as with all things equity related, there's no one-size-fits all approach that works all the time. With that in mind, let's dig a little deeper.
ATR shows the average size of the stock's recent price swings. What it doesn't tell you is what timeframe you should be looking at. This is where it pays to analyze. Let's say, for example, that XYZ is trading at 35.00, has been unusually choppy during an upward spike over the past few sessions, and currently has an ATR of 2.25. A week ago the indicator was only at 1.50 - a level that had held steady for several months. So which number do you use to help you gauge stop placement?
In most cases, the pre-spike ATR of 1.50 would be the better choice. The reason is based on something that statisticians like to call "mean reversion"; when hit with periods of volatility, most stocks tend to settle back down, rather than maintain their heightened volatility. So in the case of XYZ, using the post-spike ATR of 2.25 to calculate your stop would probably be introducing too much risk into the equation.
The "mean reversion" tendency is especially true when volatility spikes are caused by news events. Just like a rock dropped into a pond, a major news story can create choppy waters well after the initial splash. But as days pass, those ripples die down and the stock reverts back to its typical ATR.
Support and resistance levels are another important factor that should be considered when you're calculating stop placement. Imagine a stock with these characteristics:
- It's currently trading at 20.90.
- Its ATR is 0.95.
- It has major horizontal support at 20.00.
- It looks ready to move higher, and you're targeting a long play at 21.05.
The number-one factor here isn't the stock's ATR - it's the major support at 20.00. If that level is broken, you won't want anything to do with this stock. This would call for an initial stop of something in the range of 1.05 (Your entry price minus the support level). The double-ATR approach, in this case, would be 1.90. That's a lot of unnecessary risk, considering you want to bail out if the stock breaks under 20.00. And in the trading game, managing risk is a very good thing!
Here's to profits,
Kent Barton
Senior Analyst
Stocks Covered Today...Stock Splits...
Quick List
Stock 03/05 03/05 Buy Short Trailing Stops Gain
Symbol Price +/- Entry Entry Initial/Tighten Amount
------ -------- -------- -------- -------- --------------- --------
AFYA 24.38 -1.33 23.58 2.71/1.35 2.24
MOR 28.86 -1.14 27.75 2.04/1.02 1.20
ALKS 20.46 0.12 20.77 19.18 1.59/0.80 2.08
CHRS 20.45 -0.11 20.89 19.35 1.54/0.77 1.80
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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Stocks Covered Today...Stock Splits...
Market Summary
Wednesday's strong market gains were followed by a reversal on Thursday as concerns about the coronavirus were elevated by the increasing number of cases in the USA and abroad. Central banks around the globe have responded with monetary policy measures, including a 50 basis point rate cut by the Federal Reserve on Tuesday. In earnings news, shares of Zoom Video Communications (ZM $123) closed higher after the videoconferencing company doubled quarterly profit estimates on revenues up 78% compared to the same period a year ago. On the economic news front, unemployment claims were slightly above forecasts, productivity for the 4th quarter was revised lower, and factory orders decreased more than forcasted. Treasury yields again fell to new record lows, the USD/dollar and oil also closed lower. Gold moved higher.
Mar 4, 2020 Mar 5, 2020
-------------------- --------------------
Dow 27,091 +1,173 26,121 -969.58
Nasdaq 9,018.09 +334.00 8,738.60 -279.49
S&P 500 3,130 +126.75 3,024 -106.18
NYSE Volume 5.08B 5.70B
NYSE Advancers 2557 327
NYSE Decliners 423 2667
Nasdaq Volume 3.63B 3.80B
Nasdaq Advancers 2551 568
Nasdaq Decliners 700 2691
New Highs/Lows
02/27 02/28 03/02 03/03 03/04 03/05
--------------------------------------------
NYSE New Highs 22 8 16 27 41 38
NYSE New Lows 696 938 175 171 134 389
Nasdaq New Highs 56 57 68 77 66 57
Nasdaq New Lows 568 726 171 180 128 373
Stocks Covered Today...Stock Splits...
TRADER'S TIP: "Changing Horses In The Middle Of The Stream"
Here's another good reason to avoid changing rules in the middle of a trade. Waiting to finish the trade before making rule changes emphasizes the importance of having a "formal" set of trading procedures. Including a rule that regulates how and when you change your rules implies that you respect for your own rules. This one rule alone will improve your bottom line and set you apart from casual traders with no consistent methods.
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 - 3023.94 March 5, 2020
52-Week High: 3393.52
52-Week Low: 2722.27
Daily Trend: UP
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 3831.22
Resistance 2: 3427.25
Resistance 1: 3190.73
Pivot: 3023.28
Support 1: 2786.76
Support 2: 2619.31
Support 3: 2215.35
NASDAQ Composite - 8738.60 March 5, 2020
52-Week High: 9838.37
52-Week Low: 7292.22
Daily Trend: UP
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 10835.57
Resistance 2: 9776.85
Resistance 1: 9172.11
Pivot: 8718.13
Support 1: 8113.39
Support 2: 7659.41
Support 3: 6600.69
Dow Industrials - 26121.28 March 5, 2020
52-Week High: 29568.57
52-Week Low: 24680.57
Daily Trend: UP
Weekly trend: DOWN
Weekly Pivot Levels
Resistance 3: 33608.27
Resistance 2: 29886.35
Resistance 1: 27647.85
Pivot: 26164.43
Support 1: 23925.93
Support 2: 22442.51
Support 3: 18720.59
Stocks Covered Today...Stock Splits...
Market Calendar
ECONOMIC REPORTS AND EVENTS (all times are Eastern): Monday, March 02, 2020: 02-Mar 9:45 am Markit manufacturing PMI 02-Mar 10 am ISM manufacturing index 02-Mar 10 am Construction spending Tuesday, March 03, 2020: 03-Mar Varies Motor vehicle sales Wednesday, March 04, 2020: 04-Mar 8:15 am ADP employment report 04-Mar 9:45 am Markit services PMI 04-Mar 10 am ISM nonmanufacturing index 04-Mar 2 pm Beige book Thursday, March 05, 2020: 05-Mar 8:30 am Weekly jobless claims 05-Mar 8:30 am Productivity 05-Mar 8:30 am Unit labor costs 05-Mar 10 am Factory orders Friday, March 06, 2020: 06-Mar 8:30 am Nonfarm payrolls 06-Mar 8:30 am Unemployment rate 06-Mar 8:30 am Average hourly earnings 06-Mar 8:30 am Trade deficit 06-Mar 10 am Wholesale inventories 06-Mar 3 pm Consumer credit 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 TIP: "Looking for a Good Fortune Teller?"
You don't really need a psychic if you plan each position with a "what if" approach. Before entering any trade always ask - "What will I do if price moves in my favor, and what will I do if it moves against me?" Since most traders and investors never consider these questions at all, simply writing down specific answers will put you WAY ahead of the game. Remember to set any bias aside, and play the hand that's dealt.
Stocks Covered in This Issue
CONSUMER DEFENSIVE SECTOR
Afya Limited (AFYA: Consumer Defensive/Education & Training Services) - BEARISH U-TURN. The weekly trend for AFYA is down, but recent daily price activity has lifted shares upward in what's known as a "counter-trend" bounce. As the name implies, this type of rebound is against the main trend. These bounces tend to revert back to the direction of the main trend - in this case downward - once the bounce reaches significant resistance. This is exactly the situation AFYA finds itself in, as Thursday's recoil from moving average resistance presents the beginnings of a possible return to the weekly downtrend. AFYA now sits at 24.38 after reaching an intra-day high of 25.95 during the latest session. Place a short-SELL order with your broker if price drops to the 23.58 level. Follow your entry with a trailing stop of 2.71 and tighten to 1.35 on a 2.24 profit. Earnings Report Date: Mar 25, 2020. Beta: N/A. Market-Cap: 2.188B. Optionable.
HEALTHCARE SECTOR
MorphoSys AG (MOR: Healthcare/Biotechnology) - BEARISH U-TURN. Despite the fact that Bears have shown the ability to force MOR into a painful downtrend, recent bullish action has provided shareholders with some welcome relief. However, the upward reprieve may now be about to end. Thursday's intra-day price reaction near Moving Average resistance signals an increased probability that MOR will head lower in the near term. MOR now sits at 28.86. Prepare to sell shares SHORT if the weakening price reaches our trigger at 27.75. Place a 2.04 trailing stop after you enter, then reduce it to 1.02 when you've gained 1.20. Earnings Report Date: N/A. Beta: 1.32. Market-Cap: 3.717B. Not Optionable.
Alkermes plc (ALKS: Healthcare/Biotechnology) - SQUEEZE PLAY. ALKS is caught in a dilemma. The stock's compressed price range on Thursday has resulted in a condition comparable to a wound up rubber band. We anticipate that this undecided equity will take off soon, but with the direction still in question we'll let upcoming market action tell us whether to buy shares or sell short. ALKS is now at 20.46. We can capture price action either way by placing a BUY trigger at 20.77 and a SELL short trigger at 19.18. Once ALKS reveals its direction, enter your triggered order and disregard the other one. As soon as your position is in place, follow up with a trailing stop of 1.59. When you acquire a 2.08 profit, tighten the stop to 0.80. Earnings Report Date: Apr 22, 2020. Beta: 1.53. Market-Cap: 3.228B. Optionable.
Coherus BioSciences, Inc. (CHRS: Healthcare/Biotechnology) - SQUEEZE PLAY. When a stock's daily price range contracts to an unusually low point, you can safely assume that in most cases a breakout from that range will result in a nice price move. To capture a portion of this potential movement we have set both a long and a short entry into CHRS. A move to the upside will trigger our BUY entry at 20.89, while a drop to 19.35 will trigger our SELL short entry. Follow your position with a 1.54 trailing stop. Tighten the stop to 0.77 once you have a 1.80 gain. CHRS closed Thursday at 20.45. Earnings Report Date: May 06, 2020. Beta: 2.57. Market-Cap: 1.444B. 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...
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.
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.
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