September 9, 2023 - The RightLine Report
Notes From The Editor
Common Trading Mistakes...And How to Avoid Them (Part I)
One of the basic building blocks of successful trading is the stuff you don't do. While best practices such as stop-loss placement and effective risk management sharply improve your ability to grow your trading account, there are also several potential pitfalls to watch out for.
Over the coming weeks we'll take a closer look at several of these trading traps. Let's start by looking at three mistakes that are especially prevalent in the modern age of non-stop, on-demand information.
Mistake #1: Trading meme stocks that are hyped in online forums.
The promise can see be so alluring. A gang of excited Robinhood or Reddittraders pump up a stock, calling for a huge price move. Then, within hours the ticker actually starts to do what they said it would. You jump in as soon as you find out about it, only to have the position dramatically reverse course.
This "pump and dump" is a classic scheme that has continued unabated in the Information Age. However, you can easily avoid this trap by simply ignoring hype-filled forums. Also be weary of stocks that trade on very light volume; scheming traders find it much easier to push around low-volume equities.
Mistake #2: Falling in love with a "story."
The stock media loves to shape conventional wisdom. However, this doesn't always match what's really happening in the market. Imagine, for instance, that you turn on the TV and see a report on how stock prices will head lower over the next week. Your favorite mainstream Wall Street websites say the same thing.
Could those reports be right? Absolutely. But before you commit yourself to the story that's being written by the media, verify it with your own knowledge and tools. Do the technicals support the outlook for more weakness? Or are they deeply oversold and ready for a bounce? Trade based on what you see - not on what the media tells you.
Mistake #3: Overloading your screen with too many indicators.
Another classic mistake: analysis paralysis! Technical indicators are a wonderful thing, and a well-groomed daily chart can provide an excellent roadmap to likely price movements. The problem occurs when the chart starts to look more like an overgrown garden, with moving averages, indicators, and numbers creating confusion and contradictions.
The remedy for this mistake is to keep it simple and focused. Use only the technical indicators that you feel most comfortable with. If you're thinking about adding a new indicator to your line-up, give it a trial period first to see if it fits into your current strategy.
Additionally, remember that basic analyses of price action - moving averages and trendlines, for example - tend to be more effective than more obscure indicators. The reason is simple: more market participants watch the price action, and act accordingly.
Here's to profits,
Kent Barton
Senior Analyst
Stocks Covered Today Stock Splits Trader's Corner
Quick List
Stock 09/08 09/08 Buy Short Trailing Stops Gain
Symbol Price +/- Entry Entry Initial/Tighten Amount
------ -------- -------- -------- -------- --------------- --------
ALSN 59.55 1.09 60.43 3.94/1.97 1.96
COCO 28.54 -0.01 29.09 27.46 1.63/0.82 2.64
SAVA 21.11 0.05 21.78 20.1 1.68/0.84 1.64
NSSC 23.49 0.00 24 22.54 1.46/0.73 2.96
SSTI 21.27 -0.71 22.2 20.54 1.66/0.83 3.06
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.
Stocks Covered Today Stock Splits Trader's Corner
Market Summary
US stocks wrapped up a shortened trading week with a mixed performance on Friday. Key indices, including the S&P 500 Index (SPX) and the Nasdaq Composite (COMP) recorded weekly declines. Investor sentiment was tempered by increased uncertainty surrounding surging oil prices, China's economic situation, and the potential for further interest rate hikes by the Federal Reserve.
The week lacked significant economic news, resulting in investors holding their positions in anticipation of crucial inflation data scheduled for release next week, notably the Consumer Price Index (CPI) for August. Recent reports showing economic figures that were stronger than anticipated have raised concerns that the Fed may opt for rate hikes later this year to combat inflation. Treasury yields saw an uptick this week, reflecting the belief that the Fed might maintain a "higher-for-longer" stance on interest rates.
The climbing bond yields weighed on the equity markets during the week, and the near-term trajectory of stocks is likely to be influenced significantly by fixed-income benchmarks like the 10-year Treasury.
In general, the stock market may experience a period of sideways or lower price movements in the coming weeks as investors carefully assess risk factors, including elevated oil prices and concerns related to China.
Friday On The Week
-------------------- --------------------
Dow 34,576.59 75.86 -261.12 -0.75%
Nasdaq 13,761.53 12.69 -270.28 -1.93%
S&P 500 4,457.49 6.35 -58.28 -1.29%
NYSE Volume 3.27B
NYSE Advancers 1,526
NYSE Decliners 1,381
Nasdaq Volume 4.2B
Nasdaq Advancers 1,957
Nasdaq Decliners 2,328
New Highs/Lows
09/01 09/04 09/05 09/06 09/07 09/08
--------------------------------------------
NYSE New Highs 116 0 64 38 40 48
NYSE New Lows 29 0 86 88 116 96
Nasdaq New Highs 101 0 77 48 39 40
Nasdaq New Lows 95 0 157 181 274 249
Stocks Covered Today Stock Splits Trader's Corner
TRADER'S TIP: "No Retro-Trading Allowed"
No one sells at the "top" all of the time, so don't fret over selling a stock that goes up even higher after you get out. Trust your planned exit strategy and never punish yourself for selling "too early." There's always another trade around the corner.
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 - 4457.49 September 8, 2023
52-Week High: 4607.07
52-Week Low: 3491.58
Daily Trend: DOWN
Weekly trend: DOWN
Weekly Pivot Levels
Resistance 3: 4697.91
Resistance 2: 4587.15
Resistance 1: 4522.32
Pivot: 4476.39
Support 1: 4411.56
Support 2: 4365.63
Support 3: 4254.87
NASDAQ Composite - 13761.53 September 8, 2023
52-Week High: 14446.55
52-Week Low: 10088.83
Daily Trend: DOWN
Weekly trend: DOWN
Weekly Pivot Levels
Resistance 3: 14865.53
Resistance 2: 14358.37
Resistance 1: 14059.95
Pivot: 13851.21
Support 1: 13552.79
Support 2: 13344.05
Support 3: 12836.89
Dow Industrials - 34576.59 September 8, 2023
52-Week High: 35679.13
52-Week Low: 28660.94
Daily Trend: DOWN
Weekly trend: DOWN
Weekly Pivot Levels
Resistance 3: 35990.87
Resistance 2: 35303.31
Resistance 1: 34939.95
Pivot: 34615.75
Support 1: 34252.39
Support 2: 33928.19
Support 3: 33240.63
Stocks Covered Today Stock Splits Trader's Corner
Market Calendar
ECONOMIC REPORTS AND EVENTS (all times are Eastern): MONDAY, SEPT. 11 None scheduled TUESDAY, SEPT. 12 None scheduled WEDNESDAY, SEPT. 13 8:30 am Consumer price index 8:30 am Core CPI Aug. 8:30 am CPI (year-over-year) 8:30 am Core CPI (year-over-year) THURSDAY, SEPT. 14 8:30 am Initial jobless claims 8:30 am Producer price index 8:30 am Core PPI Aug. 8:30 am PPI (year-over-year) 8:30 am Core PPI (year-over-year) 8:30 am U.S. retail sales Aug. 8:30 am Retail sales minus autos 10:00 am Business inventories FRIDAY, SEPT. 15 8:30 am U.S. import prices 8:30 am Empire State manufacturing survey 9:15 am Industrial production 9:15 am Capacity utilization 10:00 am Consumer sentiment (prelim) 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: "Too Flexible?"
As traders we need to be flexible, yet that doesn't mean we should attempt too many methods at the same time. The best approach is to use a relatively simple strategy that contains enough tactical setups to take advantage of price movement in any market environment. For example, a good place to start is with a combination of Bullish Bounces for uptrends, Bearish U-Turns for downtrends, and Squeeze Plays for sideways or choppy market periods. While you can always add additional types of setups as your trading skills improve, it's always wise to start with the basics. And repetition is the key, so remember to practice, practice, practice!
Stocks Covered in This Issue
CONSUMER CYCLICAL SECTOR
Allison Transmission Holdings, Inc. (ALSN: Consumer Cyclical/Auto Parts) - NEW HIGH DIP. ALSN's strong performance produced a new 52-week high several days ago. Since then we've been waiting for a pullback from that high in order to get on board with a low-risk entry. Friday's reversal near Moving Average support provides us with a New High Dip setup. Set your BUY trigger at 60.43, and follow your purchase with a 3.94 trailing stop which can be tightened to 1.97 when you have a 1.96-point gain. ALSN closed Friday at 59.55. Earnings Report Date: Oct 24, 2023. Beta: 0.99. Market-Cap: 5.332B. Optionable.
CONSUMER DEFENSIVE SECTOR
The Vita Coco Company, Inc. (COCO: Consumer Defensive/Beverages-Non-Alcoholic) - SQUEEZE PLAY. COCO is stuck in a Bull/Bear deadlock. Fortunately for traders this impasse should be resolved soon, with one side or the other taking control. We want to be positioned for a potential quick move up or down, so get ready to catch this train with a BUY entry at 29.09 and a SELL short entry at 27.46. Once your trade is filled, enter a 1.63 trailing stop. Tighten it to 0.82 after a 2.64 gain. COCO closed on Friday at 28.54. Earnings Report Date: Nov 07, 2023. Beta: N/A. Market-Cap: 1.611B. Optionable.
HEALTHCARE SECTOR
Cassava Sciences, Inc. (SAVA: Healthcare/Biotechnology) - SQUEEZE PLAY. SAVA shareholders know what it feels like to be squeezed. Friday's slim price range reveals uncertainty on both sides of the table, a situation which often resolves itself by either Bears or Bulls quickly gaining a clear advantage. The question is "who will win?" Near-term market action tell us whether we should sell short or we should buy shares instead. SAVA closed Friday at 21.11. The plan is to enter in the right direction by placing a BUY trigger at 21.78 and a SELL short trigger at 20.1. Once SAVA establishes direction, place your triggered order. As soon as you are in the trade, place a trailing stop in the amount of 1.68. After you've collected a 1.64 profit, tighten the stop to 0.84. Earnings Report Date: Nov 06, 2023. Beta: -0.09. Market-Cap: 885.987M. Optionable.
INDUSTRIALS SECTOR
Napco Security Technologies, Inc. (NSSC: Industrials/Security & Protection Services) - SQUEEZE PLAY. Friday's trading session left NSSC in a very narrow price range after buyers and sellers fought to a near stalemate. Both sides are looking for some traction, and a breakout either way could provide a nice gain in the short term. To get aboard, set your BUY trigger at 24 and your SELL short trigger at 22.54. One of the orders will be triggered by upcoming price action. When your market order is filled, cancel the remaining trigger and enter a 1.46 trailing stop. Once you have a 2.96 profit, reduce the stop to 0.73. Earnings Report Date: Nov 06, 2023. Beta: 1.16. Market-Cap: 863.73M. Optionable.
TECHNOLOGY SECTOR
SoundThinking, Inc. (SSTI: Technology/Software-Application) - SQUEEZE PLAY. The ticker for Friday's session shows SSTI is now stuck in a tight price band. With the cyclical contraction and expansion nature of volatility in force, we should see a new period of price expansion in the days ahead. To improve the odds of catching the next directional wave, place a BUY trigger at 22.2 and a SELL short trigger at 20.54. When SSTI starts moving out of its narrow range, your order will be triggered. Once you're in the trade, cancel the opposing trigger and set a 1.66 trailing stop. Upon reaching a 3.06 profit, resize the stop to 0.83. Earnings Report Date: Nov 06, 2023. Beta: 1.36. Market-Cap: 260.117M. 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
Overbought/Oversold Overload
Analysts love to show off their expertise by proclaiming that the markets have become overbought or oversold. Unfortunately, few of us seem to understand what these terms really mean or what we should do when these moments of truth arise.
Should we run for the hills because a market is overbought, or perhaps load up the boat because it's oversold? And how do we know when one of our trades might fall prey to one of these extreme conditions?
The best way to understand overbought or oversold markets is to study the nature of supply and demand. At any given moment, a finite pool of buyers and sellers is available to take action on a particular stock. The trading activity of this crowd usually stays within fairly narrow boundaries.
But imbalances develop over time and force one side to pull the trigger, sometimes prematurely. This "uses up" that side of the market and awakens price mechanics that favor the other side.
Bollinger Bands offer an effective tool for measuring overbought/oversold conditions. Notice how Nvidia (NVDA) triggers a short-term reversal each time price bars thrust outside the extremes of the 20-day Bollinger Bands. These outer bands tell swing traders to expect a reversal before real evidence appears on the price chart. This allows them to take high-profit exits while the rest of the crowd is caught in the moment.
It's important to note that overbought/oversold markets are relative to a trader's time frame. In the NVDA chart, some reversals were simple pullbacks in the underlying trend, while others represented major market turns. It is vitally important for traders to define their holding period before reacting to short-term price swings. Major profits will be lost by planning the trade in one time frame but executing it in another.
Stochastics represents the classic overbought/oversold oscillator. Unfortunately, most traders don't understand how to interpret the information it provides. The worst thing you can do is jump ship just because stochastics hits a high or low extreme. Most swing-trading profits are booked in the early stages of overbought or oversold markets. Of course, that's where most of the risk is as well.
Use simple double-top or double-bottom patterns to pinpoint reversals driven by overbought or oversold conditions. The best signals come when stochastics makes a lower high (or higher low) and expands in the opposite direction. This type of pattern will often complete ahead of price change, and should be acted upon without waiting for further confirmation.
A single price bar can change everything. Stocks trade with an average high-low range through most market conditions. When this range expands sharply after an extended trend, it issues a loud overbought-oversold signal.
What exactly does this mean? First off, when a price bar expands in a new breakout, it's the beginning of something and not a reversal signal. But when a stock ramps from one price level to another, and then pops an expansion bar, get ready to close up shop in a hurry.
Traders must deal with the relativity of overbought/oversold markets. A longer-term Wilder's relative strength index (RSI) really drives home this vital point. It captures broad cycles of market movement, and it can stay at overbought or oversold levels for extended time periods.
As with the stochastics indicator, hold your ground until RSI shows definite signs of moving in the other direction. This usually comes when it drops below (lifts above) the extension line. Even then, compare RSI with the price pattern to determine whether a major turn, or simple pullback, is under way.
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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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