Notes From The Editor

The Dow vs. the S&P 500: Which Is More Important?

When it comes to tracking the market, media attention is usually focused most heavily on the Dow Industrial Average. Although it is good to monitor the Dow if you are trading one of it's components or DIA, the fact that it consists of only 30 stocks makes the Dow too easily manipulated to be of much help when reading the larger market.

In contrast, the S&P 500 is made up of 500 stocks representing the most powerful companies in the world. When it comes to accurately assessing market performance at critical junctions, this broad index has proven to be much more reliable than either the Dow or the Nasdaq.

Similar to how the movement of a school of fish influences the movement of each individual fish in the school, the larger market influences the price movement of the individual stocks that make up the market.

Not all stocks move in exactly the same direction and same speed as the larger market, yet the greater "school" of stocks significantly affects the price action of most individual stocks.

Bottom Line: It pays to know the pivotal price levels in the S&P 500, which we include in the Technical Analyst section of the RightLine Report This is a good rule of thumb for anyone who trades individual stocks, and especially important for trading the SPY.

Trade well!

Thomas Sutton, Editor

Quick List

    
Stock     10/06     10/06      Buy      Short   Trailing Stops     Gain 
Symbol    Price      +/-      Entry     Entry   Initial/Tighten   Amount 
------  --------  --------  --------  --------  ---------------  --------

SPHR      39.23      1.22     40.42                  5.07/2.54      2.58
JILL      27.86      0.40     28.56                  2.27/1.14      1.66
ANF       55.01      0.46     56.18                  4.56/2.28       2.9
SLNO      23.28     -0.53     24.25     22.04        2.21/1.11       0.9
IMVT      36.23     -0.38     37.43     34.77        2.66/1.33      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 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

US stock markets staged a much-needed rebound to close the week, marking a significant turnaround for the S&P, which reversed by 100 points from its lows. This bounce ended the S&P's four-week losing streak. The Nasdaq also managed to secure its second consecutive week of gains, despite a robust jobs report earlier in the day.

Initially, the outlook appeared grim as futures dipped following a September jobs report that nearly doubled economists' expectations. This raised concerns of an additional rate hike from the Fed in November, pushing the 10-year yield back near its 16-year high of approximately 4.9%. However, S&P futures only reached as low as 4,242.25 in the morning, remaining above its 200-day moving average support around 4,230 and above Wednesday's low of 4,235.50. This gave hope to bullish sentiment as a pre-market bounce continued into the afternoon as short positions were covered.

Despite a challenging period with sharp declines in August and September, key technical levels held, and oversold sectors saw buying, contributing to the market's rally. NYSE breadth witnessed a significant reversal from the morning, with advancers outpacing decliners by more than a 2:1 margin. All S&P sectors closed in the "green," except for Consumer Staples, which remained weak.

Looking ahead, another eventful week awaits with the Producer Price Index (PPI) scheduled for Wednesday and the Consumer Price Index (CPI) inflation data on Thursday. Earnings season also kicks off next week with companies like PEP, DPZ, UNH, and DAL reporting early in the week, followed by major banks such as JPM, Citi, and WFC on Friday.

In the commodities market, oil prices managed to finish higher on Friday, with WTI crude rising to $82.79 per barrel, despite experiencing their most substantial weekly losses since March, falling by nearly -9% during the week. Gold prices saw a modest increase, bouncing back from a nine-day losing streak to settle at $1,845.20 an ounce, although concerns over another rate hike persisted due to robust jobs data. The USD/dollar initially gained strength following the strong jobs report but pulled back later in the morning and early afternoon as stocks rallied, snapping an 11-week winning streak.

Overall, the markets displayed resilience during a volatile week, with investors closely monitoring economic data and market developments for potential opportunities and risks.

                      Friday                 On The Week      
                  --------------------   --------------------
Dow                 33,407.58   288.01       -99.92     -0.3%
Nasdaq              13,431.34   211.51      +212.02      1.6%
S&P 500              4,308.50    50.31       +20.45     0.48%

NYSE Volume                      3.91B                       
NYSE Advancers                   1,862                       
NYSE Decliners                   1,027                       

Nasdaq Volume                    4.32B                       
Nasdaq Advancers                 2,684                       
Nasdaq Decliners                 1,576                       

                                 New Highs/Lows

                   09/29  10/02  10/03  10/04  10/05  10/06
                 --------------------------------------------
NYSE New Highs        29     17     10     11     10     27
NYSE New Lows         89    277    443    265    221       
Nasdaq New Highs      37     18     20     17      9     33
Nasdaq New Lows      146    388    562    216     93    314
   

TRADER'S TIP: "Learning From The Past"

One thing is for certain; the stock market can move up and down faster than most investors ever imagine. The cost of being unprepared for a trip in the wrong direction can be extremely expensive, both financially AND emotionally. Many traders and investors think risk control is boring, and had much rather spend their time chasing some ultra-hot stock tip. Just remember that the main reason most traders and investors lose money is because they don't have a planned risk control strategy to protect them from excessive losses.

It hurts to lose. That's why so many of our friends and relatives stop talking about their investments when things go bad. With no plan to limit losses, their stocks can look like the energizer bunny in reverse - they keep going and going, lower and lower. Even folks who recover some of their losses can be helplessly frozen, not knowing what to do. They still have no plan to prevent it from happening again.

Help stop the madness. If you know someone in this situation, tell them about RightLine, and we'll show them how to control risk. You can be sure they'll sleep better at night!

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 - 4308.50 October 6, 2023

52-Week High: 4607.07
52-Week Low: 3491.58
Daily Trend: DOWN
Weekly trend: DOWN
Weekly Pivot Levels
Resistance 3: 4498.31
Resistance 2: 4390.66
Resistance 1: 4349.58
Pivot: 4283.01
Support 1: 4241.93
Support 2: 4175.36
Support 3: 4067.71

NASDAQ Composite - 13431.34 October 6, 2023

52-Week High: 14446.55
52-Week Low: 10088.83
Daily Trend: DOWN
Weekly trend: DOWN
Weekly Pivot Levels
Resistance 3: 14231.41
Resistance 2: 13767.74
Resistance 1: 13599.54
Pivot: 13304.07
Support 1: 13135.87
Support 2: 12840.40
Support 3: 12376.73
        
Dow Industrials - 33407.58 October 6, 2023

52-Week High: 35679.13
52-Week Low: 28660.94
Daily Trend: DOWN
Weekly trend: DOWN
Weekly Pivot Levels
Resistance 3: 34692.23
Resistance 2: 33981.48
Resistance 1: 33694.53
Pivot: 33270.73
Support 1: 32983.78
Support 2: 32559.98
Support 3: 31849.23
 

Market Calendar

ECONOMIC REPORTS AND EVENTS (all times are Eastern):    

MONDAY, OCT 9					
9:00 am	Dallas Fed President Logan speaks				
12:50 pm	Fed Gov. Jefferson speaks
				
TUESDAY, OCT 10					
6:00 am	NFIB optimism index	
10:00 am	Wholesale inventories	

WEDNESDAY, OCT 11					
8:30 am	Producer price index	
8"30 am	Core PPI	
8:30 am	PPI year over year				
8:30 am	Core PPI year over year				
2:00 pm	Minutes of Fed's September FOMC meeting
				
THURSDAY, OCT 12					
8:30 am	Initial jobless claims	
8:30 am	Consumer price index	
8"30 am	Core CPI	
8:30 am	CPI year over year			
8:30 am	Core CPI year over year
			
FRIDAY, OCT 13					
8:30 am	Import price index	
8:30 am	Import price index minus fuel	
10:00 am	Consumer sentiment (preliminary)
For a chart of typical Up or Down market reactions to specific major US economic reports 
go to:  Economic Indicator Effects

TRADER'S TIP: "Using The Gap Open Tactic When Selling Short"

The Gap Open Tactic works as well when we sell short as it does when we buy a stock. If the stock gaps down at the open, wait for it to take out its low of the first half-hour then enter 0.25 below that point.

For more on the Gap Open Tactic go to: http://www.rightline.net/education/gapopen.html.

Stocks Covered in This Issue

COMMUNICATION SERVICES SECTOR

Sphere Entertainment Co. (SPHR: Communication Services/Entertainment) - BULLISH BOUNCE. SPHR'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 SPHR back in step with the bullish weekly trend, so our BUY entry trigger is set at 40.42. Once you hold a position, trail a stop of 5.07. Tighten it to 2.54 on a 2.58 gain. SPHR closed at 39.23 on Friday. Earnings Report Date: Nov 07, 2023. Beta: 1.36. Market-Cap: 1.36B. Optionable.

CONSUMER CYCLICAL SECTOR

J.Jill, Inc. (JILL: Consumer Cyclical/Apparel Retail) - BULLISH BOUNCE. Positive price behavior near moving average support on Friday qualifies JILL for a Bullish Bounce setup. After several sessions of declining prices, JILL should soon begin trading in step with its established weekly uptrend. Tell your broker to BUY shares if JILL moves up to our entry trigger set at 28.56. You can also enter a 2.27 trailing stop, to be replaced with a 1.14 trailing stop when you obtain a 1.66 profit. JILL closed Friday at 27.86. Earnings Report Date: Dec 04, 2023. Beta: 1.04. Market-Cap: 295.391M. Not Optionable.

Abercrombie & Fitch Co. (ANF: Consumer Cyclical/Apparel Retail) - BULLISH BOUNCE. The charts for ANF 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 56.18, and follow your entry with a trailing stop of 4.56. Tighten it to 2.28 when a 2.9 profit is reached. ANF ended the latest session at 55.01. Earnings Report Date: Nov 20, 2023. Beta: 1.45. Market-Cap: 2.8B. Optionable.

HEALTHCARE SECTOR

Soleno Therapeutics, Inc. (SLNO: Healthcare/Biotechnology) - SQUEEZE PLAY. Friday's narrow price range has created a potentially profitable setup in SLNO, as sellers and buyers find themselves in a near tie for control of price direction. The next short-term trend could go either way, so prepare for a move out of the draw within the next day or so. Set a BUY entry at 24.25 and a SELL short entry at 22.04. Let SLNO's price action determine your long or short entry. Once the order is filled, place a 2.21 trailing stop, and tighten it to 1.11 upon getting a 0.9 gain. SLNO closed Friday at 23.28. Earnings Report Date: Nov 07, 2023. Beta: 0.15. Market-Cap: 760.744M. Not Optionable.

Immunovant, Inc. (IMVT: Healthcare/Biotechnology) - SQUEEZE PLAY. A look at IMVT's daily chart shows what a price squeeze is all about. The constricted high-low daily trading range has produced a setup similar to a tightly coiled spring. Expect price to move sharply soon, with the direction yet to be determined. Let the upcoming market action resolve whether you will buy shares or sell short. To capture a move either way, place a BUY trigger at 37.43 and a SELL short trigger at 34.77. Once IMVT shows which way it's headed, place your triggered entry order. As soon as your order is filled, follow with a trailing stop of 2.66 and tighten to 1.33 on a 2.16 gain. IMVT closed Friday at 36.23. Earnings Report Date: Nov 02, 2023. Beta: 0.68. Market-Cap: 5.203B. 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  
---------------- -------     --------    -------     ------  -------   

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.

Trader's Corner

Stop Loss Questions And Answers - Part II

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.

Q: I want to hold on to a trade as long as the pattern stays intact. So I place my stop loss just outside the edge of the pattern. But what do I do when price breaks out in my favor for a bar or two and then falls back into the pattern?

A: You need to exit right away after a false breakout or breakdown, regardless of where you've placed your stop loss. The false move creates overhead supply (or underlying demand in a short sale) and raises the odds the pattern will break the other way. This is classic pattern-failure dynamics.

Rigid stop-loss placement with global rules undermines good trade management. Management is more important than knowledge and all the technical analysis in the world. You have to be a manager of your trades and your trading style. That gives you the courage to re-enter good positions when you get blown out of them, if and when conditions change.

Q: A stock breaks out and moves in my favor, but my stop gets hit most of the time on a pullback. How can I avoid this?

A: This scenario illustrates the major problem traders face when they chase breakouts. For example, you get a breakout and a strong move in your favor. You're taught to protect profits, so you place a stop-loss that guards some of the gains in anticipation of making more money when the stock runs. But the nature of price mechanics suggests that after an initial rally, a stock will pull back to test the original breakout level.

Both of your stop-loss choices have problems. First you protect profits with a trailing stop, but you risk getting hit when price pulls back to the breakout level. Second, you place the stop under the breakout level, but then you turn a winner into a loser. This also adds risk, because pullbacks often overshoot support-resistance just to get to the stops that are buried there.

The pullback from a rally is a two-edged sword, because it's a buy signal and a stop-loss level at the same time. In other words, if I'm already positioned I feel the need to sell, but if I'm not positioned, I feel the need to buy. The solution is counterintuitive and simple. Train yourself to avoid breakout entries and instead trade pullback entries.

Q: Should I lift my stop-loss when I know the stock will gap against my position when it opens?

A: I usually lift the stop-loss, but every case is different. Watch the pre- and postmarket trading, and see how much pressure the stock faces and whether it's trading above or below major support-resistance. The ability to hold higher price levels predicts that the stock will stabilize when the market opens. Keep in mind that New York Stock Exchange stocks may give few clues in extended hours.

When there's news that could affect the stock, I pull the stop loss and keep the position through the open. Then I try to hold for the first 10 to 15 minutes to see if it reverses or runs. If the stock starts to run or breaks a large support-resistance level, I get out immediately. The strategy can lead to a larger loss, but it's a tradeoff, because the gap prints the high or low for the day more than 70% of the time.

Q: Do market insiders see our stop-loss orders and purposely try to trigger them?

A: Some brokers hold stops locally, while others send them out to the "floor." But it doesn't really matter whether insiders see them or not because they know where you'll place them, even if they're not physical. Millions of traders came before you and applied the same logic to stop placement that you do every day. So unless you find a more creative way to accomplish this task, you'll wind up selling at the worst possible price anyway.

Q: Once a trade turns profitable, when do I adjust the stop loss to ensure I won't take a loss? And thereafter, if the trade continues in my favor, what rule do I use for trailing stops?

A: I figure an amount of initial wiggle room based on my goals for the trade. If the reward target is several points away, the stock needs to move around a lot, and I don't want to get in its way. If it's a small trade, I don't want to lose a penny after I get the first thrust away from my entry price.

The best strategy as the trade evolves is to use support-resistance on the 60-minute chart to move your trailing stop. For example, you get your rally and the stock congests for a few bars. When price breaks even higher, move your stop behind the last congestion pattern. This way, price needs to break the smaller support before it hits your trailing stop.

Get more aggressive as the stock approaches your reward target. Shift your strategy after the price passes 75% of the distance between your entry and intended exit. At that point, there's no sense risking a bundle in order to make a few pennies. Move the stop in close so any small reversal takes you out of the trade.

Q: How can we trade profitably with stop-gunning games going on all the time?

A: Stop-running or stop-gunning (both terms are used) occurs when a price is pushed through support or resistance in order to trigger the stops that are hiding there. After the stop supply is exhausted, the market bounces back in the other direction, usually winding up where it was before the exercise began.

You only have two choices if you're positioned before a stop-gunning exercise. First, keep the stop-loss outside commonly targeted price levels. This is tough to do because it adds a lot of risk to the trade. Second, keep the stop loss in very close and take another position after the stop-gunning is over.

Look to step into stop-gunning games from the sidelines rather than being a sitting duck with a position bought or sold at a dangerous level. You can often get dramatic fills with good timing during these games.

Q: Why do I always place my stop loss at an exact high or low?

A: You're describing a condition known as trader's disease. It's caused by the market tendency to gravitate toward the price that causes the most pain. Options traders are especially vulnerable to this affliction. It's not really sinister, it's just the nature of the market.

Start by realizing that volatile stocks can't be traded with tight and scientific stops, because all their support-resistance levels are channeled. This pushes a stock back and forth through common stop levels but keeps the ongoing trend intact. If you get up close to a price chart, you'll notice there's large bar-to-bar overlap most of the time. This makes it hard to get your move without getting shaken out.

Q: How can I keep my stop loss from getting hit all the time on Nasdaq tech stocks?

A: Keep your size down when trading volatile stocks. Before you trade, ask yourself how far that stock can move in its natural wiggle. This quick analysis takes a long time to master and is complicated by the tendency of market volatility to change from day to day. You can also avoid getting your stops hit by picking lower-beta stocks to trade. This means avoiding most four-letter stocks.

Q: When should I use a stop-limit order?

A: I never use a stop limit on anything. It's too easy for the stock to go right through your price, not get filled, and trigger a deeper loss. When you want out, you want out. When you need to get out, you need to get out.

A regular stop-loss order becomes a market order when price trades through it. This gives you more control than a stop-limit order, as long as you choose your stock wisely. Keep in mind the more volatile the stock, the wider the potential loss will be on this type of order. When possible, pick lower-volatility stocks that will hit your stop and trigger at that price, without slippage.

********************

This guest article was written by Alan Farley, author of "The Master Swing Trader." If you haven't already, be sure to read "Stop Loss Questions And Answers - Part I" in last weekend's 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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