Mosaic Chart Alerts
Mosaic Chart Alerts
A hawkish Fed chooses inflation.
Welcome back to Mosaic Chart Alerts!
In this newsletter, I’ll focus on the best setups that I’m monitoring for both long and short positions. With a chart and short write-up, this is a quick way to scan and plan potential trades.
These ideas are the end result of my process to identify stocks offering the right combination of fundamentals along with a proper chart setup.
Here are my notes from a focus list of setups I’m monitoring.
Stock Market Update
Heading into today’s latest Federal Reserve meeting on interest rates, Fed Chair Jerome Powell faced a no win situation. If the Fed backs off rate hikes to help stabilize the banking system, then it appears the central bank is giving up the inflation fight. But by staying committed to raising rates higher for longer to tame inflation, the banking crisis could worsen.
A hawkish Powell leaned toward the former, and reiterated the Fed’s stance to keep raising rates if needed while describing the banking system as resilient. In addition to today’s 25 basis point rate hike, the Fed made no change to its balance sheet reduction plan or estimates on where the fed funds rate would finish this year. Not only that, but Powell also acknowledged the turmoil in the financial system has led to a steep tightening in financial conditions that could further dampen economic activity. You can see in the chart below that conditions are tighter than at any time since the Fed started this rate hiking campaign.
Stocks struggled to find direction early on, swinging between gains and losses following the Fed’s statement on rate policy and Powell’s press conference. But the S&P 500 ultimately finished down 1.65% with no signs that the Fed will prematurely end its tightening campaign in spite of stress in the banking system.
Despite the volatility, the key is to not get caught up in the reaction to headlines while staying objective in analyzing conditions. I highlighted the combination of oversold market breadth and bearish sentiment in last week’s Market Mosaic, and that largely remains the case now. Here’s an updated look below at the percent of stocks trading above their 20-day moving average, which is still attempting to move higher off depressed levels.
There’s still a lack of quality breakouts happening on the long side, and I remain heavy cash coming into today’s Fed meeting. But there are several sectors with breakout setups developing, which includes cyclical sectors like semiconductors and housing. Breakouts in those areas of the market would send a positive “risk-on” signal, which is something I discussed monitoring last week. I’m adding several new setups from those sectors to this week’s long watchlist. I’m removing SEDG and OC as the recent volatility takes those stocks below key moving averages. On the short watchlist, I’m also removing SPWR and NOVA as those bearish continuation setups complete.
Keep reading below for all the updates…
Long Trade Setups
SKY
Working up the right side of a basing pattern going back to the end of 2021. That’s brought the relative strength (RS) line right back to the prior highs, while the MACD is resetting at the zero line. Looking for an initial move over $73 to target the prior highs.
DRI
Consolidation pattern going back to late 2021, with more recent trading in a tight range. The RS line is close to making a new 52-week high, where I’m also looking for price confirmation on a close over $153 resistance.
MPWR
Big run to start the year from around $350 back up to resistance at $535. MACD became extended on that move higher, where a tight trading range since mid-February is helping reset momentum. Looking for a breakout attempt over $535.
NSP
Ran up to test the $127 resistance level. Momentum became extended on that gain with the MACD now resetting, which helps the breakout setup. RS line still hovering near the highs.
SKYT
Small-cap semiconductor stock holding near key moving averages on the recent pullback. Looking for a move over $15, which is price and trendline resistance. A more volatile stock so position size accordingly on a breakout.
GFS
Recent IPO that tried to break above $70 resistance and failed. The recent gains has the MACD turning up from the zero line while the RS line is near the highs. Looking for another attempt at $70 that can test the prior high at $80.
AVNW
Massive consolidation pattern in the works for nearly two years. Recent move lower is filling the gap at the $33 level. Seeing the MACD reset closer to zero before trying to breakout over the $40 level.
Short Trade Setups
LMND
Currently testing the lows from December around the $13 level. Looking for a move below to confirm next leg of the downtrend, with the RS line at the lows.
AFRM
Trading back at the December lows following a recent MACD reset under the zero line. Looking for price to close under the $8.50 level.
If you haven’t noticed yet, I trade breakouts! I trade based on the daily chart for long positions. And for price triggers on long setups, I tend to wait until the last half hour of trading to add a position. I find that emotional money trades the open, and smart money trades the close. If it looks like a stock is breaking out, I don’t want a “head fake” in the morning followed by a pullback later in the day.
New Filter: After extensive back testing and live implementation, I am adding new highs on the RS line as a breakout filter. I find this improves the quality of the price signal and helps prevent false breakouts. So if price is moving out of a chart pattern, I want to see the RS line (the green line in the bottom panel of my charts) at new 52-week highs. Conversely, I prefer an RS line making new 52-week lows for short setups.
Also for long positions, I use the 21-day exponential moving average (EMA) as a stop. If in the last half hour of trading it looks like a position will close under the 21-day EMA, I’m usually selling whether it’s to take a loss or book a profit.
For short (or put) positions, I trade off a four-hour chart instead of a daily. Why? There’s a saying that stocks go up on an escalator and down on an elevator. Once a profitable trade starts to become oversold on the four-hour MACD, I start to take gains. Nothing like a short-covering rally to see your gains evaporate quickly, so I’m more proactive taking profits on short positions. I also use a 21-period EMA on the four-hour chart as a stop. If there is a close above the 21-period EMA, I tend to cover my short.
For updated charts, market analysis, and other trade ideas, give me a follow on Twitter: @mosaicassetco
Disclaimer: these are not recommendations and just my thoughts and opinions…do your own due diligence! I may hold a position in the securities mentioned in this newsletter.