Notes From The Editor

Driving With the Trend: Why Fight It When you Can Flow With It?

For a moment let's visualize stock market price action as a loop in the shape of an oval racetrack. The traffic flows in one direction - north - until a 180-degree u-turn routes it in the opposite direction - south. When traffic reaches another u-turn at the other end of the track, it's routed back in the original direction, north.

Behind the Wheel, Ahead of the Curve ...

Good driving requires anticipation. Momentum and speed are essential parts of market flow, but they're only part of the game. Knowing how to drive through a steep banked curve is just as important as miles- per-hour. Once you become familiar with the market track you can more easily anticipate where the likely turnarounds will take place. These u-turns offer unique circumstances which only experienced drivers realize.

Reversals = Opportunities ...

The ongoing battle between bulls and bears always produces reversals. It is vital for traders to view reversals as valuable opportunities to gain a better position. It's during a reversal that you find safe entries into new positions and profitable exits out of old ones.

Yep, You're In the Race ...

A trend is a trend whether it's up or down, north or south. You can flip the chart over and it's still a trend. Most people don't drive very well in a downtrend, because in their minds they think they can only drive well in an uptrend. That sort of thinking isn't favorable to winning.

Round and Round We Go ...

Having a deeper awareness of trends and reversals allows you to develop the needed skills for making profits during periods of market decline. It pays well to study the track, especially reversals, both historical and real time. At the very least this information lets you protect your capital while others are losing theirs.

A Simple Track Strategy ...

One of the best methods is to simply identify market direction, then go with the flow. This relatively easy for everyone during bull markets headed north - yet not so easy on the south side of the track. Since most investors don't know how to drive in bearish southerly conditions, traders who do know how can easily advance their position. This is certainly good to know, since much of the race is spent on the downtrend side of the track.

The Race Is In Your Head ...

Wikipedia introduces psychological flow as "... the mental state of operation in which the person is fully immersed in what he or she is doing by a feeling of energized focus, full involvement, and success in the process of the activity."

Apply this model to your driving in the stock market and you see that the type of flow we get into as individuals is completely compatible with the flow of price action on the charts. When you're in the groove, what previously seemed to be a frantic roller coaster ride becomes an exhilarating path to the checkered flag.

Enjoy the weekend!

Thomas Sutton, Editor

Quick List

    
Stock     11/04     11/04      Buy      Short   Trailing Stops     Gain 
Symbol    Price      +/-      Entry     Entry   Initial/Tighten   Amount 
------  --------  --------  --------  --------  ---------------  --------

CTRN      21.89      0.92     22.21                  2.04/1.02      2.28
TRDA      22.05      0.17     22.69     21.05        1.64/0.82      2.46
NUVL      30.76      1.50     31.26     27.36         3.9/1.95      3.08
SAVE      21.49      0.55     21.77                  1.43/0.72      1.34
HCKT      20.95      0.11     21.35                  1.26/0.63      1.06

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 major US stock averages chalked up a weekly loss despite closing higher on Friday following news of an increase in the unemployment rate and a rise in October nonfarm payrolls. In equities, Starbucks (SBUX $92) reported a profit along with a drop in China sales, Amgen (AMGN $269) topped expectations and raised its guidance, PayPal (PYPL $73) announced positive results and a collaboration with Apple (AAPL $139), and shares of DoorDash (DASH $50) were up although the food delivery firm posted a bigger loss than expected. Gold and oil prices moved upward, the USD/dollar was lower, treasuries were mixed.

                      Friday                 On The Week      
                  --------------------   --------------------
Dow                 32,403.22   401.97      -458.58     -1.4%
Nasdaq              10,475.25   132.31       -627.2    -5.65%
S&P 500              3,770.55    50.66      -130.51    -3.35%

NYSE Volume                      5.42B                       
NYSE Advancers                   2,245                       
NYSE Decliners                     913                       

Nasdaq Volume                    5.48B                       
Nasdaq Advancers                 2,689                       
Nasdaq Decliners                 1,897                       

                                 New Highs/Lows

                   10/28  10/31  11/01  11/02  11/03  11/04
                 --------------------------------------------
NYSE New Highs        89     94     98     67     52     85
NYSE New Lows        113    109     89    142    264    217
Nasdaq New Highs     121    138    140    116     73     93
Nasdaq New Lows      197    167    162    249    374    353
   

TRADER'S TIP: "Sector Timeframes"

When trading with the flow of sector rotation, it's wise to keep a clear view of the strategic timeframe being used for a holding period. On a micro scale, money flows across the trading floor rapidly throughout the day, moving in and out of specific industries as the Street looks for direction. Some days the morning session strongly favors one sector, only to abandon that same industry by midday as more attractive opportunities arise.

It's fast paced, and following that price movement intra-day is for short-term traders with real-time tools and considerable experience. Longer-term investors, on the other hand, are usually better off watching support and resistance areas for the index as a whole (such as watching the $SOX when monitoring semiconductors). A chart of the index reads much like individual stocks, and often sheds light on the group's future direction.

The bottom line is that we can all follow sector rotation and take advantage of the opportunities generated, as long as we keep an appropriate timeframe.

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 - 3770.55 November 4, 2022

52-Week High: 4818.62
52-Week Low: 3491.58
Daily Trend: DOWN
Weekly trend: DOWN
Weekly Pivot Levels
Resistance 3: 4220.77
Resistance 2: 4007.13
Resistance 1: 3888.84
Pivot: 3793.49
Support 1: 3675.20
Support 2: 3579.85
Support 3: 3366.21

NASDAQ Composite - 10475.25 November 4, 2022

52-Week High: 16212.23
52-Week Low: 10088.83
Daily Trend: DOWN
Weekly trend: DOWN
Weekly Pivot Levels
Resistance 3: 12418.35
Resistance 2: 11524.93
Resistance 1: 11000.09
Pivot: 10631.51
Support 1: 10106.67
Support 2: 9738.09
Support 3: 8844.67
        
Dow Industrials - 32403.22 November 4, 2022

52-Week High: 36952.65
52-Week Low: 28660.94
Daily Trend: DOWN
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 35090.49
Resistance 2: 33745.61
Resistance 1: 33074.41
Pivot: 32400.73
Support 1: 31729.53
Support 2: 31055.85
Support 3: 29710.97
 

Market Calendar

ECONOMIC REPORTS AND EVENTS (all times are Eastern):    

Monday, November 07, 2022:
07-Nov   3 pm   Consumer credit (level change)

Tuesday, November 08, 2022:
08-Nov          Election Day
08-Nov   6 am   NFIB small-business index

Wednesday, November 09, 2022:
09-Nov  10 am   Wholesale inventories (revision)

Thursday, November 10, 2022:
10-Nov  8:30 am   Consumer price index (monthly change)
10-Nov  8:30 am   Core CPI (monthly change)
10-Nov  8:30 am   CPI (12-month change)
10-Nov  8:30 am   Core CPI (12-month change)
10-Nov  8:30 am   CPI (3-month SAAR)
10-Nov  8:30 am   Core CPI (3-month SAAR)
10-Nov  8:30 am   Initial jobless claims
10-Nov  8:30 am   Continuing jobless claims
10-Nov   2 pm   Federal budget (compared with year ago)

Friday, November 11, 2022:
11-Nov          Veterans Day holiday
11-Nov  10 am   UMich consumer sentiment (early)
11-Nov  10 am   UMich consumer 5-year inflation expectations (early)


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

TRADER'S TIP: "A Bane or Boon?"

Volatility can be a double-edged sword when trading, but a few reminders can help keep things in perspective. First of all, recall that volatility is what creates trading opportunities, so as long as we focus on the short term, share prices that move dramatically should be welcomed. Secondly, risk management is a must when volatile conditions prevail. Make absolutely certain that exit strategies are pre-planned in order to avoid unwanted losses. And finally, use the Gap Open Strategy to help determine buy and sell points. You'll be glad you did! For more on the Gap Open Strategy go to: http://www.rightline.net/education/gapopen.html

Stocks Covered in This Issue

CONSUMER CYCLICAL SECTOR

Citi Trends, Inc. (CTRN: Consumer Cyclical/Apparel Retail) - BULLISH BOUNCE. This trader-friendly setup turns repetitive stock behavior into real profits. Based on the tendency for up-trending stocks to drop briefly and then resume the up-trend, the Bullish Bounce places traders into excellent stocks when conditions are primed for more skyward movement. CTRN's current price action near moving average support signals a potential BUY entry at 22.21, followed by a 2.04 trailing stop which can be tightened to 1.02 upon earning 2.28. CTRN closed Friday at 21.89. Earnings Report Date: Nov 28, 2022. Beta: 2.01. Market-Cap: 183.425M. Optionable.

HEALTHCARE SECTOR

Entrada Therapeutics, Inc. (TRDA: 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 TRDA. A move to the upside will trigger our BUY entry at 22.69, while a drop to 21.05 will trigger our SELL short entry. Follow your position with a 1.64 trailing stop. Tighten the stop to 0.82 once you have a 2.46 gain. TRDA closed Friday at 22.05. Earnings Report Date: N/A. Beta: N/A. Market-Cap: 691.675M. Not Optionable.

Nuvalent, Inc. (NUVL: 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 NUVL's case we will enter a BUY should it reach the 31.26 level, or a SELL short trade if it drops to 27.36. As usual a trailing stop is essential, 3.9 which should be tightened to 1.95 on a 3.08 gain. NUVL closed Friday at 30.76. Earnings Report Date: N/A. Beta: N/A. Market-Cap: 1.489B. Not Optionable.

INDUSTRIALS SECTOR

Spirit Airlines, Inc. (SAVE: Industrials/Airlines) - BULLISH BOUNCE. If you are looking for another bouncer with profits in mind, SAVE fits the bill. Shares have been in retreat-mode lately, but now this stock is in the process of bouncing from support. Currently priced at 21.49, plan to buy shares at 21.77 and use a 1.43 trailing stop. Tighten the stop to 0.72 on a 1.34 gain. Earnings Report Date: N/A. Beta: 1.09. Market-Cap: 2.339B. Optionable.

TECHNOLOGY SECTOR

The Hackett Group, Inc. (HCKT: Technology/Information Technology Services) - BULLISH BOUNCE. HCKT has charted an upward weekly trend until recently when sellers showed up to push prices lower. On Friday the selling ran into solid support. A potential bounce up from this level should attract buyers and likely return HCKT to the previously established uptrend. The Bullish Bounce set-up is the basis for our BUY entry, so be ready to go long on a rise to our trigger at 21.35. Set a trailing stop of 1.26, tightening to 0.63 on a 1.06 profit. HCKT closed at 20.95 on Friday. Earnings Report Date: Nov 08, 2022. Beta: 0.69. Market-Cap: 663.759M. 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  
---------------- -------     --------    -------     ------  -------   
Copart            CPRT       11/4/2022 11/4/2022     2-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.

Trader's Corner

"Program Trading"

The financial news media often refers to "program trading" or "High Frequency Trading." CNBC even goes so far as to report program trading buy and sell levels for every session. The Aite Group, LLC claims that high-frequency trading (HFT) accounts for 73 percent of U.S. equity trading, despite making up just two percent of trading firms. The TABB Group has a slightly lower number. TABB claims that high-speed trades account for 53 percent of U.S. equity trades.

But you get the point. Despite which numbers are correct, HFT is making up the majority of stock market transactions in the United States. So exactly what are they talking about?


Let's take a brief look at "program trading." This is a general term that refers to trades that are automatically executed by computers, usually in large volume "baskets" of stocks. There are different types of program trading, but the most common, and the one referred to on CNBC, is a type of securities trading intended to profit from temporary differences between an index like the S&P 500, and the actual value of the stocks that make up the index.

This sort of program trading is called "index arbitrage," and is based purely on the price relationship between the two - not on any fundamental reason. The individual company's earnings, dividends, and growth prospects are not factors, and neither is any economic reason, like inflation, changes in interest rates, or government actions.

Other frequently used program trading terms are "Fair Value" and "the premium," or "spread."

- Fair Value is the total value of the stocks underlying an index security plus the cost of any expenses incurred while a position is being held, such as interest and trading commissions.

- The "premium" (commonly referred to as the "PREM" or "spread") is the difference between the most active S&P 500 Index Futures Contract minus the actual cash value of the S&P 500 Stock Index. That difference makes up the profit that program trading is based on.

When the PREM, or spread, rises to a certain level, computer-driven "buy" programs are automatically activated by large institutional clients, who buy the individual stocks in the S&P 500 Stock Index and sell the S&P 500 Stock Index Futures Contract against those positions.

When the "spread" drops to a certain level, "sell" programs activate and the exact opposite takes place. These extremely low-risk transactions allow institutional traders to capture a few points of profit before the PREM returns to normal, or Fair Value.

There you have a quick look at program trading and how it works. In the days ahead we will review some companies that offer fee-based information services for individual active traders and investors, and also examine the circuit breakers and curbs used by major stock exchanges to minimize the sometimes negative effects of program trading.

In the meanwhile, always use Risk Control and strategically placed exit stops to insure that the tidal waves produced by these events give you profits and prevent any erosion to your trading account!

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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