September 23, 2023 - The RightLine Report
Notes From The Editor
Common Trading Mistakes...And How to Avoid Them (Part III)
In recent RightLine Reports we've looked at potholes and traps that can wreak havoc on even the most carefully-formulated trading strategies. Here are three more common mistakes for your consideration.
Mistake #6: Trading stocks like you're gambling in a casino
On the surface, trading and gambling seen to have a lot in common. You risk money to make money. Sometimes you're lucky, sometimes you're not. Occasionally you'll find yourself on a hot streak or losing streak. But dig deeper, and you'll find that Wall Street is a far cry from Vegas.
The most important difference? When trading, the only "house" advantage is the commission you pay your brokerage. The odds aren't inherently stacked against you. But traders sometimes make the mistake of being haphazard with their choices; they throw their money at a stock without really taking the time to think it through, or without using risk management techniques. This approach might work okay at the craps table, but it's ill-suited to trading.
Mistake #7: Averaging down
This goes hand-in-hand with a mistake we covered last week: holding on to losing positions. This trap is easy to fall into unless you have some serious discipline. It's human nature to look for the silver lining in a bad situation. But if you're holding a losing position, buying more shares at a cheaper price is rarely a good option.
Think of it this way: if the stock is already heading the opposite direction, then it's not behaving the way you thought it would. Something is amiss. Buying more shares and averaging down will only compound your losses if the equity continues to go against you. The better approach is to keep your original stop in place, and focus your resources on finding promising set-ups somewhere else.
Mistake #8: Overtrading
Constant trading can be tempting because you're more likely to hit a nice winner. However, you'll also be more likely to throw caution to the wind and be less selective when finding potential trades. And boy oh boy, do brokerages love this mistake; commissions can add up fast when you're overtrading, eating away at any profits you may have accumulated.
Frantic trading may be the bread-and-butter of daytraders, but it's ill-suited to those who use a longer timeframe. The better approach is to be picky, trading only when a stock meets your requirements. Also remember that sometimes - especially in a sideways or extremely choppy and unpredictable market - staying on the sidelines is the best option.
Here's to profits,
Kent Barton
Senior Analyst
Stocks Covered Today Stock Splits Trader's Corner
Quick List
Stock 09/22 09/22 Buy Short Trailing Stops Gain
Symbol Price +/- Entry Entry Initial/Tighten Amount
------ -------- -------- -------- -------- --------------- --------
FVRR 24.25 0.44 24.8 23.25 1.55/0.78 2.24
DFH 22.32 0.19 22.92 21.27 1.65/0.83 2.4
GH 25.93 -0.18 26.73 24.64 2.09/1.05 4.36
ARWR 27.24 0.01 28 26.22 1.78/0.89 2.04
CFLT 29.41 0.00 30.35 28.29 2.06/1.03 2.94
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
Stocks experienced a slight decline on Friday, capping off their largest weekly loss in six months, as investor confidence remained fragile due to recent actions by the Fed. Despite bond yields hovering near their recent highs, they saw a slight decrease today, offering some respite to tech and growth-focused investments compared to value investments. The Nasdaq remained relatively stable, with Activision Blizzard making gains as Microsoft's $69 billion acquisition of the gaming company is poised to clear its final regulatory hurdle. Meanwhile, European stocks closed with modest losses, and oil prices climbed above $90, bolstered by Russia's announcement of a ban on diesel-type fuel and gasoline exports.
Concerns about sustained higher interest rates persist as global central banks cautioned against premature expectations of rate cuts this week, resulting in rates across the yield curve reaching multiyear highs. While the Federal Reserve is likely finished or nearly finished raising interest rates, investors are now contemplating what comes next.
Policymakers have adjusted their expectations, predicting two rate cuts in 2024 instead of the four previously priced in by the markets. The Fed anticipates stronger growth, with the economy returning to its long-term average of 1.8% GDP growth accompanied by 2% inflation by 2026.
Our perspective is that the range in which long-term yields may trade over the next year has shifted upward, driven by a more resilient economy rather than heightened inflation expectations. Nevertheless, with the 10-year yield at 4.5%, we believe there is greater downside risk than upside potential. We expect growth to decelerate from above-trend to below-trend levels, core inflation to slow down, Fed policy to plateau or come very close, and bond valuations to be historically attractive.
Looking ahead, there are few significant market catalysts expected in the coming month until the next inflation report and the commencement of the third-quarter earnings season in mid-October. However, markets are likely to react to headlines and developments concerning a potential government shutdown. The government's new fiscal year begins on October 1, and as of now, Congress has not passed any of the 12 appropriations bills required to fund various programs. A government shutdown, in which federal agencies would cease all nonessential operations, appears highly probable if spending bills are not approved by month-end. While government shutdowns have occurred regularly in recent history, they have typically been of short duration.
From a market perspective, this uncertainty could lead to increased volatility. However, like most political events, government shutdowns have had limited impact on equity performance. Stocks have been positive half the time during government closures and have typically been higher three and six months later.
Friday On The Week
-------------------- --------------------
Dow 33,963.84 -106.58 -654.4 -1.89%
Nasdaq 13,211.81 -12.18 -496.52 -3.62%
S&P 500 4,320.06 -9.94 -130.26 -2.93%
NYSE Volume 3.35B
NYSE Advancers 1,372
NYSE Decliners 1,514
Nasdaq Volume 4.32B
Nasdaq Advancers 1,842
Nasdaq Decliners 2,443
New Highs/Lows
09/15 09/18 09/19 09/20 09/21 09/22
--------------------------------------------
NYSE New Highs 45 40 46 50 14 21
NYSE New Lows 91 103 103 68 220 176
Nasdaq New Highs 61 59 44 52 27 32
Nasdaq New Lows 238 271 297 275 444 366
Stocks Covered Today Stock Splits Trader's Corner
TRADER'S TIP: "When Your Indicators Contradict The Trend"
Due to their overly sensitive nature, some technical indicators will turn in one direction while the price trend remains in the other. A rule of thumb - whenever a price trend and indicators are in conflict, always go with price until the trend is broken.
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 - 4320.06 September 22, 2023
52-Week High: 4607.07
52-Week Low: 3491.58
Daily Trend: DOWN
Weekly trend: DOWN
Weekly Pivot Levels
Resistance 3: 4667.37
Resistance 2: 4517.50
Resistance 1: 4418.78
Pivot: 4367.63
Support 1: 4268.91
Support 2: 4217.76
Support 3: 4067.89
NASDAQ Composite - 13211.81 September 22, 2023
52-Week High: 14446.55
52-Week Low: 10088.83
Daily Trend: DOWN
Weekly trend: DOWN
Weekly Pivot Levels
Resistance 3: 14489.19
Resistance 2: 13938.55
Resistance 1: 13575.17
Pivot: 13387.90
Support 1: 13024.53
Support 2: 12837.26
Support 3: 12286.62
Dow Industrials - 33963.84 September 22, 2023
52-Week High: 35679.13
52-Week Low: 28660.94
Daily Trend: DOWN
Weekly trend: DOWN
Weekly Pivot Levels
Resistance 3: 35887.19
Resistance 2: 35058.15
Resistance 1: 34510.99
Pivot: 34229.11
Support 1: 33681.95
Support 2: 33400.07
Support 3: 32571.03
Stocks Covered Today Stock Splits Trader's Corner
Market Calendar
ECONOMIC REPORTS AND EVENTS (all times are Eastern): MONDAY, SEPT. 25 None scheduled TUESDAY, SEPT. 26 8:30 am New home sales 9:00 am S&P Case-Shiller home price index (20 cities) 10:00 am Consumer confidence S 1:30 pm Fed Gov. Bowman speaks WEDNESDAY, SEPT. 27 8:30 am Durable-goods orders 8:30 am Durable-goods minus transportation THURSDAY, SEPT. 28 8:30 am Initial jobless claims 8:30 am GDP (revision) 1:00 pm Fed Gov. Cook speaks 4:00 pm Fed Chairman Powell speaks FRIDAY, SEPT. 29 8:30 am Personal income 8:30 am Personal spending 8:30 am PCE index 8:30 am Core PCE index 8:30 am PCE (year-over-year) 8:30 am Core PCE (year-over-year) 8:30 am Advanced U.S. trade balance in goods 8:30 am Advanced retail inventories Aug. 8:30 am Advanced wholesale inventories 9:45 am Chicago Business Barometer 10:00 am Consumer sentiment (final) 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: "Stock Too Expensive?"
Sometimes traders are hesitant to buy a stock in the $75 to $150 range because it is priced "too high." Actually that price range holds no greater risk than a lower priced stock - if you just enter smaller positions. To do this properly, be sure to use the RightLine Risk Control Calculator 100% of the time. It converts every position to a "low risk" trade, and allows you to take advantage of the more rapid price movement that more expensive stocks often enjoy. You can access it at http://www.rightline.net/rcc/index.html using your email address and password.
Stocks Covered in This Issue
COMMUNICATION SERVICES SECTOR
Fiverr International Ltd. (FVRR: Communication Services/Internet Content & Information) - SQUEEZE PLAY. Friday's narrow price range has created a potentially profitable setup in FVRR, 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 24.8 and a SELL short entry at 23.25. Let FVRR's price action determine your long or short entry. Once the order is filled, place a 1.55 trailing stop, and tighten it to 0.78 upon getting a 2.24 gain. FVRR closed Friday at 24.25. Earnings Report Date: Nov 07, 2023. Beta: 1.71. Market-Cap: 930.693M. Optionable.
CONSUMER CYCLICAL SECTOR
Dream Finders Homes, Inc. (DFH: Consumer Cyclical/Residential Construction) - SQUEEZE PLAY. Traders are feeling the pressure as DFH's intra-day price range on Friday shrunk to the narrowest spread in over a week. The tension between buyers and sellers should provide enough pent-up engergy for a breakout move in the days ahead, so get ready to trade with the new trend. To achieve that, place a BUY entry at 22.92 and a SELL short entry at 21.27. DFH's price movement will decide which entry is filled. As soon as you're in the trade, enter a 1.65 trailing stop. Tighten it to 0.83 after you get a 2.4 gain. DFH closed Friday at 22.32. Earnings Report Date: Nov 01, 2023. Beta: 1.59. Market-Cap: 2.078B. Optionable.
HEALTHCARE SECTOR
Guardant Health, Inc. (GH: Healthcare/Diagnostics & Research) - SQUEEZE PLAY. A look at GH'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 26.73 and a SELL short trigger at 24.64. Once GH shows which way it's headed, place your triggered entry order. As soon as your order is filled, follow with a trailing stop of 2.09 and tighten to 1.05 on a 4.36 gain. GH closed Friday at 25.93. Earnings Report Date: Nov 01, 2023. Beta: 0.86. Market-Cap: 3.205B. Optionable.
Arrowhead Pharmaceuticals, Inc. (ARWR: Healthcare/Biotechnology) - SQUEEZE PLAY. Friday's trading action forced ARWR's daily price range into an abnormally narrow state. This translates into opportunity; for the cyclical nature of price volatility is to shrink extensively, then swell rapidly as shares move in one direction or another. Instead of trying to predict the direction ARWR will take when price volatility begins to increase, we'll set both a BUY (long) and a SELL (short) trigger to get us into the right trade. Be ready to BUY shares at 28 if ARWR moves higher, and place your order to SELL short at 26.22 if price declines to that level. As usual follow your entry with a trailing stop, 1.78 should be sufficient. Reduce your stop to 0.89 on a 2.04 gain. ARWR closed Friday at 27.24. Earnings Report Date: Nov 27, 2023. Beta: 0.99. Market-Cap: 2.92B. Optionable.
TECHNOLOGY SECTOR
Confluent, Inc. (CFLT: Technology/Software-Infrastructure) - SQUEEZE PLAY. CFLT is caught in a dilemma. The stock's compressed price range on Friday 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. CFLT is now at 29.41. We can capture price action either way by placing a BUY trigger at 30.35 and a SELL short trigger at 28.29. Once CFLT 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 2.06. When you acquire a 2.94 profit, tighten the stop to 1.03. Earnings Report Date: Oct 31, 2023. Beta: 0.99. Market-Cap: 8.894B. 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
Recognizing False Breakouts And Whipsaws
Swing traders encounter false breakouts and whipsaws throughout their careers. That shouldn't be surprising, though, because all we're doing is playing an odds game.
Even a perfect setup can fall apart for no reason and with little warning. This reminds us that risk management is mandatory if we want to trade successfully.
Breakouts occur in zones of conflict. Both sides of the market are very passionate at these turning points, but no one knows how much force is required to carry price into a sustainable trend. So any position you take near a breakout level carries considerable risk, no matter how perfect a pattern looks.
Price can respond in different ways to breakouts. First, it may carry through successfully to higher levels. Second, it may generate whipsaws that force losses on both sides of the market. Third, it may trap buyers in a false move and start a trend in the opposite direction. Each of these outcomes requires careful trade management.
A successful breakout occurs in three phases. It begins when price breaks through resistance on increased volume. We'll call this the action phase. Price expands a few points or ticks, and then reverses as soon as buying interest fades.
This starts the reaction phase. The market sells off and spawns the first pullback, where fresh buyers see a chance to get in close to the breakout price. If all systems are go, a second rally kicks in and carries price above the initial breakout high. This marks the resolution phase.
The three phases of a successful breakout depend on certain volume characteristics. Demand must exceed supply during the initial breakout. Volume should "dry up" when it pulls back in the reaction phase. And new buyers need to jump in to ensure a successful resolution phase. Whipsaws and false breakouts result when these supply-demand dynamics fall out of balance.
What exactly are whipsaws? Simply stated, they're choppy price swings back and forth through common support or resistance levels. Natural tug and pull generates most whipsaws.
But hidden hands also manipulate price through common stop levels in order to generate volume, and intentionally wash out one side of the market. Whatever the source, whipsaws are responsible for many of the losses in a swing trader's portfolio.
Whipsaws emerge when a breakout can't generate an efficient reaction phase. This failure may or may not trigger a major reversal. The pullback shakes out weak hands and forces price back into resistance.
But there's usually a healthy supply of buyers throughout the choppy movement. These bulls step in repeatedly to support the market. A successful breakout can begin quickly after a whipsaw fades out. The loss of volatility actually triggers a buying signal on many trading screens. This starts a bounce that generates the momentum needed to carry price up and beyond the last high.
Major reversals occur when price action traps one side of the market. Many traders wait to enter positions at key breakout levels. Once these folks execute their trades, they're at the mercy of the market.
In other words, their profits depend on others seeing the breakout and jumping in behind them. False breakouts occur when this second crowd fails to appear.
An overbought, one-sided market can drop quickly below a breakout level. This throws all the traders who bought the breakout into losing positions. Without the support of fresh buyers, a stock can fall from its own weight. Each incremental low triggers more stops and increases fear within the trapped crowd. Momentum builds to the downside, breaks key support and invites fresh short-sale signals from a whole new batch of traders.
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This special guest article was written by Alan Farley, author of "The Master Swing Trader."
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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