Notes From The Editor

Every day brings unique technical situations, news events, and other dynamics that shift the market. But along with these ever-changing factors are some common tendencies that savvy traders can profit from.

What I'm referring to here is the market's "rhythm" throughout the day.

In the past we've talked about your personal morning habits, and how they can impact your trading account. Similarly, the market has its own daily habits. This shouldn't be a surprise, considering that when it's all boiled down, the market consists of thousands of humans making decisions.

When trading commences at the opening bell, the movement is fast and furious. Pre-market trading is suddenly reflected in gaps. Stocks not trading in pre-market react to overnight events.

I've often heard market veterans refer to the first hour of trading as "amateur hour" - a time when traders are lured in by quick prices changes, then whipsawed for a loss by the increased volatility.

In practice, I've found that this first hour can offer plenty of enticing entry points. Individual stocks often over-react when the broader market is making a decisive move. Imagine, for example, an equity called XYZ that falls sharply with the major indices at the beginning of trading.

While this sympathetic reaction is understandable, buyers suddenly begin to take notice as the stock approaches support at its 50 DMA. If that moving average is touched and successfully tested, XYZ could put in a decisive bottom and begin to retrace those early losses. The bounce can be particularly strong if the broader market also turns around.

I'm not necessarily endorsing jumping head-over-heels into a trade just five minutes after trading begins; with so little time, it's hard to get a feel for where the market and stock might be headed. However, once the initial dust settles during the first 15-30 minutes, windows of opportunity can suddenly open. The key is to have a reliable entry point, such as a bounce off a trendline or moving average, then place your stop slightly below that level.

Early trading is also the time to employ our gap-open strategies for entering trade set-ups that have gapped beyond their entry points. You can visit https://prorightline.com/gap-open-stock-trading-tactic/ for more information.

Just as morning action has its own unique "vibe" and tendencies, so to does the afternoon half of the session. We'll touch on that next week and identify some specific tendencies that all traders should be aware of.

Here's to Profits,

Kent Barton
Senior Analyst

Quick List

    
Stock     09/02     09/02      Buy      Short   Trailing Stops     Gain 
Symbol    Price      +/-      Entry     Entry   Initial/Tighten   Amount 
------  --------  --------  --------  --------  ---------------  --------

CTRN      21.01      0.35     21.37     19.69        1.68/0.84      3.68
SD        20.15      0.33     20.71     19.11          1.6/0.8       2.1
MGY       23.18      0.65     23.87      22.3        1.57/0.79      2.14
DSGN      21.57      0.14     22.31     20.57        1.74/0.87      3.48
VTYX      21.80     -0.19     22.52     20.67        1.85/0.93      3.38

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 stocks closed significantly lower on Friday ahead of an extended Labor Day holiday weekend. The bearish session came on the heels of the August labor report, which showed job growth was slightly better than expected and wage gains declined. The news did little to lower market expectations about how aggressive the Fed will be when determining interest rates later in September. In other economic headlines, factory orders dipped unexpectedly in July. In equities news, Broadcom (AVGO $500) beat quarterly earnings projections and presented a friendly outlook, while Lululemon Athletica (LULU $314) also topped profit forecasts and raised its guidance. Gold, treasuries and oil prices were higher, the USD/dollar finished near even.

                      Friday                 On The Week      
                  --------------------   --------------------
Dow                 31,318.44  -337.98      -964.96    -2.99%
Nasdaq              11,630.86  -154.26      -510.85    -4.21%
S&P 500              3,924.26   -42.59       -133.4    -3.29%

NYSE Volume                      3.67B                       
NYSE Advancers                   1,338                       
NYSE Decliners                   1,829                       

Nasdaq Volume                    4.28B                       
Nasdaq Advancers                 1,678                       
Nasdaq Decliners                 2,831                       

                                 New Highs/Lows

                   08/26  08/29  08/30  08/31  09/01  09/02
                 --------------------------------------------
NYSE New Highs        28     30     12     11     14     18
NYSE New Lows         97    137    147    160    252    101
Nasdaq New Highs      37     24     18     24     34     42
Nasdaq New Lows      172    227    256    227    425    217
   

TRADER'S TIP: "Penny Stocks"

There seem to be two primary ways that penny stocks move up rapidly. First is the famous "Pump & Dump" tactic that made several well-known chat room "traders" extremely wealthy during the late nineties. The way this works is someone loads up on the cheap stock, then tells everyone in the "free" chat rooms that the stock is about to make a huge move. Of course shares do take off once word gets out, because demand increases while the Pump & Dumpers control the float. After a day or so of ramping the price higher, the chat room guru sells into the rally. This leaves the less experienced buyers holding worthless paper.

The second method involves massive Public Relations campaigns. Direct postal mail and email SPAM is sent to millions of people in order to create a false demand for the stock. By the time the average buyer gets in, it's to late - the scammers have sold to the unsuspecting public and are gone. Let the buyer beware!

Penny stocks and other OTCs - Over The Counter - stocks are easily manipulated. Though these schemes are often illegal, they still occur. This is the main reason that RightLine only covers stocks that trade on the major exchanges.

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 - 3924.26 September 2, 2022

52-Week High: 4818.62
52-Week Low: 3636.85
Daily Trend: DOWN
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 4282.31
Resistance 2: 4122.97
Resistance 1: 4023.61
Pivot: 3963.63
Support 1: 3864.27
Support 2: 3804.29
Support 3: 3644.95

NASDAQ Composite - 11630.86 September 2, 2022

52-Week High: 16212.23
52-Week Low: 10565.14
Daily Trend: DOWN
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 12924.11
Resistance 2: 12345.76
Resistance 1: 11988.31
Pivot: 11767.41
Support 1: 11409.96
Support 2: 11189.06
Support 3: 10610.71
        
Dow Industrials - 31318.44 September 2, 2022

52-Week High: 36952.65
52-Week Low: 29653.27
Daily Trend: DOWN
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 33894.70
Resistance 2: 32751.63
Resistance 1: 32035.03
Pivot: 31608.56
Support 1: 30891.96
Support 2: 30465.49
Support 3: 29322.42
 

Market Calendar

ECONOMIC REPORTS AND EVENTS (all times are Eastern):    

MONDAY, SEPT. 5 
Labor Day holiday - None scheduled  

TUESDAY, SEPT. 6 
9:45 am S&P U.S. services PMI (final) Aug
10 am ISM services index Aug 

WEDNESDAY, SEPT. 7 
8 am Cleveland Fed President Loretta Mester speaks 
8:30 am International trade balance July  
2 pm Beige Book 

THURSDAY, SEPT. 8 
8:30 am Initial jobless claims Sept  
8:30 am Continuing jobless claims Aug
10 am Quarterly services
3 pm Consumer credit July  

FRIDAY, SEPT.9 
10 am Wholesale inventories revision 

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

TRADER'S TIP: "Triangles and Time Frames"

Always check the next larger time frame when trying to determine if a triangle pattern is likely to lead to an upward breakout. For example, if you are trading a daily chart, refer to the weekly chart to see which way the trend is headed. If the larger trend is up, a triangle on the next lower time frame is more likely to break out higher.

Stocks Covered in This Issue

CONSUMER CYCLICAL SECTOR

Citi Trends, Inc. (CTRN: Consumer Cyclical/Apparel Retail) - 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 CTRN's case we will enter a BUY should it reach the 21.37 level, or a SELL short trade if it drops to 19.69. As usual a trailing stop is essential, 1.68 which should be tightened to 0.84 on a 3.68 gain. CTRN closed Friday at 21.01. Earnings Report Date: Nov 28, 2022. Beta: 1.97. Market-Cap: 176.387M. Optionable.

ENERGY SECTOR

SandRidge Energy, Inc. (SD: Energy/Oil & Gas E&P) - 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 SD. A move to the upside will trigger our BUY entry at 20.71, while a drop to 19.11 will trigger our SELL short entry. Follow your position with a 1.6 trailing stop. Tighten the stop to 0.8 once you have a 2.1 gain. SD closed Friday at 20.15. Earnings Report Date: Nov 07, 2022. Beta: 2.45. Market-Cap: 740.347M. Optionable.

Magnolia Oil & Gas Corporation (MGY: Energy/Oil & Gas E&P) - SQUEEZE PLAY. In certain stocks a tightly constricted price range is a sign that neither bulls nor bears are confident of winning in the near term. This often means that the side that gives up first causes a quick move in the opposite direction. In these fear dominated skirmishes, opposing traders always benefit from the retreat. In the Squeeze Play setup you can actually play both sides of the inevitable surge. MGY traders reached this state of stand-off on Friday with the tightest range of the past seven days. You can take advantage of their efforts by placing a low risk BUY trigger at 23.87 and a SELL short trigger at 22.3. After one of the two orders is filled, cancel the un-triggered order and place a trailing stop at 1.57 which can be tightened to 0.79 on a 2.14 gain. MGY closed Friday at 23.18. Earnings Report Date: Oct 31, 2022. Beta: 2.13. Market-Cap: 6.702B. Optionable.

HEALTHCARE SECTOR

Design Therapeutics, Inc. (DSGN: Healthcare/Biotechnology) - SQUEEZE PLAY. Trader indecision has put DSGN 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 22.31 and a SELL short entry at 20.57. Now it's up to DSGN to show us which entry will be filled. Once the trade is underway place a 1.74 trailing stop, which can be tightened to 0.87 after you achieve a 3.48 profit. DSGN closed on Friday at 21.57. Earnings Report Date: Nov 07, 2022. Beta: N/A. Market-Cap: 1.204B. Optionable.

Ventyx Biosciences, Inc. (VTYX: Healthcare/Biotechnology) - SQUEEZE PLAY. The struggle between buyers and sellers has resulted in VTYX'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 22.52 and a SELL order at 20.67. Regardless of which order is triggered, cancel the other one and follow your entry with a 1.85 trailing stop. Tighten the stop to 0.93 once you have a 3.38 gain. VTYX closed Friday at 21.80. Earnings Report Date: N/A. Beta: N/A. Market-Cap: 1.11B. Not 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  
---------------- -------     --------    -------     ------  -------   
Nasdaq Inc        NDAQ       7/20/2022  8/29/2022    3-for-1   Yes
Tesla             TSLA       8/5/2022   8/25/2022    3-for-1   Yes
Palo Alto Net     PANW       8/23/22    9/14/22      3-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

"Position Size Matters" by Alexander Elder, MD

The owner of a stock-trading firm in a suburb of New York had asked me to run a psychological training group for his traders. The traders were shocked at the idea of a psychiatrist coming in and loudly insisted they 'weren't crazy.' The group got filled only after the manager told his worst performers they had to join or else. Our results were such that six weeks later we had a waiting list for the second group.

The firm had it's own proprietary day-trading system, which worked well enough for the two top traders to make millions. Others trading the same system made less and quite a few lost money. We met once a week for two hours and focused on psychology and money management.

In one of our first meetings a trader complained that he had lost money each day for the past 13 days. His manager confirmed that he was following the firm's system but could not make any money. I said that my hat was off for anyone who could lose for 13 days straight and have the intestinal fortitude to come in and trade the next morning. I then asked how many shares he traded, since the firm set a maximum for each trader. He was permitted to buy or sell 700 shares per trade, but voluntarily reduced it to 500 while on his losing streak.

I told him to drop down to 100 shares until he had two profitable weeks during which he had more winning days than losing. Once he cleared that hurdle, he could go up to 200 shares. Then, after another 2-week profitable period, he could go up to 300 shares, and so on. He was allowed a 100 share increment after two weeks or profitable trading. If he had a single losing week, he'd have to drop back to the previous week's level until he had a new profitable 2-week period. In other words, he had to start small, go up in size slowly, and drop down fast in case of trouble.

That trader loudly objected that 100 shares was not enough - he would not be able to make any money. I told him to stop kidding himself, since trading a bigger size only let him lose more money, and he agreed to my plan. When we met a week later he reported sheepishly that he had four profitable days out of five and was profitable overall. He made very little money because his trading size was so small, but for the first time in weeks he was ahead of the game. He continued to make money during the next week and then stepped up to 200 shares. In the next meeting he asked, 'Do you think it could be psychological?' - and the group roared.

How come a man who lost money trading 500 shares made money trading 100?

As the group pondered, I took a $10 bill out of my pocket and asked whether anyone would like to earn it by climbing on top our long narrow conference table and walking on it from one end to the other. Several hands went up. Well, said I, then let me offer $1,000 to anyone who'll come up with me to the roof of our 10-story office building and use a board as wide as the table to walk above the street to the roof of another 10-story building. No one volunteered.

I started egging on the group - the board will be as wide and sturdy as the conference table, we'll do it a windless day, I'll pay $1,000 cash on the spot. Still no takers. Why? Both challenges involved walking a short distance on a two-foot wide board - but the size of the trade went up, both the reward and the risk. If you lost your balance on the conference table, you'd jump down a couple of feet and land on the carpet. If you lost your balance between two rooftops, you'd hit the asphalt 10 floors below.

When the level of risk goes up, our ability to perform goes down.

Beginners often make money on small trades. They become a little more experienced and confident, increase their trading size - and lose. Their system hasn't changed, but bigger size makes them stiffer and less nimble. Most beginners are in a hurry to make a killing, and guess who gets killed.

Overtrading means trading a size that's too large for you. Some stockbrokers outside the US offer a 'shoulder' of 10:1, allowing you to buy $10 worth of stock for every $1 you deposit with the firm. Some currency houses offer a shoulder of 1:100. Overtrading generates big commissions in a hurry. Poor futures traders look for brokers with the lowest margin requirements. If the minimum margin in gold is $2,000, an eager beaver with $10,000 may buy five contracts. Each includes 100 oz of gold, making his account swing $500 for every $1 move in gold. His equity swings 5% for every $1 change! If gold goes against him, he is cooked. If it goes his way, that beginner will be convinced he's discovered a great new way of making money, continue to trade recklessly and bust out on the next trade.

When a scuba diver puts on his tank and rolls off the side of the boat, clenching his mouthpiece, he has a device called an octopus attached to his air tank. It consists of several tubes, one leading to his mouthpiece, another to the flotation vest, and yet another to an instrument that shows how much air he has left in his tank. While enjoying the reef and the fish, he keeps glancing at the gauge to see how much air he has left. If it goes too low, he may not have enough to get back to the surface or else he may have to come up so fast his blood will boil. Scuba diving is a deadly sport for illiterates and hotheads.

Putting on a trade is like diving for treasure. There are fortunes down on the ocean floor, there is gold between the rocks. As you scoop it up, remember to glance at your air gauge. Will you calculate how much gold you can afford to take without endangering your survival? The ocean floor is littered with the remains of divers who saw great opportunities. They reached for them without thinking whether they had enough air to return to the boat.

A professional diver thinks about his air supply first. If he doesn't get any gold today, he'll go for it tomorrow. All he needs to do is survive and dive again. Beginners kill themselves by reaching for more than they can carry and running out of air. The lure of free gold on the ocean floor is too strong. Free gold! It reminds me of a Russian saying - "the only free thing is the cheese in a mousetrap."

Greed is a common emotion, not limited to humans. There are tribes in Africa that catch monkeys by putting tidbits of food into jars with narrow necks, tied to stakes in the ground. A monkey wiggles its hand into a jar, grabs a tidbit, but cannot pull it out because only an open hand can go through the narrow neck. The monkey is still tugging at the bait with its fist stuck in the jar when the hunters come to pick it up it. Monkeys do themselves in because of their greed, grabbing and refusing to let go. Think of them when you feel tempted to put on a large trade with no stop.

Simply knowing how to analyze markets will not make you a winner. A professional trader needs strong money management skills. All successful traders survive and prosper thanks to their discipline. The 2% Rule will keep you safe from the sharks, the 6% Rule from the piranhas. Then, if you have a halfway decent trading system, you'll be ahead of the game.

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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