Mosaic Chart Alerts

The next hurdle for the S&P 500.

Apr 12, 2023

Welcome back to Mosaic Chart Alerts!

In this post, I’ll focus on 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

Most investors probably think this week’s key event belongs with the updated consumer inflation report. Coming in with a 5% increase in March compared to last year, the Consumer Price Index was slightly below expectations and shows inflation is at least moving in the right direction. But instead of focusing on lagging economic indicators, I’m far more interested in what’s happening under the stock market’s hood this week.

That’s because we’re finally starting to see breadth expansion on the rally that started back in mid-March. A couple weeks ago, I warned that narrow participation and lagging cyclical sectors put the rally on an unstable foundation. But the average stock is starting to catching up. I noted in the post below how there’s even positive divergences showing up in the market, with the percent of stocks trading above their 20-day moving average leading the S&P 500 earlier this week.

The next big hurdle I’m watching is how the S&P 500 handles resistance from the ascending triangle pattern shown below. This is a four-hour chart of S&P 500 futures, where trendline resistance has been in play since early February. A breakout could support a bigger move over the 4200 level, where the index hasn’t traded since last August. And I will once again be watching if the recent breadth expansion can hold on any move higher for clues on the durability of any rally attempt. Alternatively, a breakdown will keep me on the sidelines.

With the sideways action in market this week, there have not been any new breakouts from the watchlist. But several stocks are trading just below key resistance levels, and are on my shortlist for a trade if momentum picks up. MPWR has been exhibiting more weakness than I prefer to see on a setup, so I’m removing that stock to make room for a new long idea. The watchlist of short setups remains intact this week, where a couple watchlist stocks are now testing key support levels.

Keep reading below for all the updates…

Long Trade Setups

BBW

Volatile price action, but creating a resistance level around $25 going back to December. Price increase today starting to take out that level, with the relative strength (RS) line close to new highs.

SPSC

Recent price action part of a bigger basing pattern since late 2021. MACD reset at zero with the RS line near the highs. Watching for a trendline break above the $153 level.

SKY

Recently failed on a breakout attempt over $73. A jump in volume along with RS at new highs were positive signs, but price fell back into the pattern. Keeping on watch for another week, with $75 now being the level to watch.

DRI

Consolidation pattern going back to late 2021, with more recent trading emerging from a tight range. The RS line made a new 52-week high when price broke out over $153, with the stock now back testing support.

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.

GFS

Took another shot at the $70 last week, but RS and volume did not confirm the move. Stock is now pulling back and testing the 50-day moving average. Will keep on watch with the breakout level moving up to $72.

Short Trade Setups

UPWK

Tested the $10 support level twice since December, now turning back lower again which follows a MACD reset below the zero line. Starting to move below that trigger level.

LMND

Tested the lows from December around the $13 level, with MACD in a position to support a move lower. Looking for a move below to confirm next leg of the downtrend, with the RS line at the lows.

AFRM

Still hanging around the December lows with another MACD reset under the zero line. Looking for price to close under the $8.50 level.

Rules of the Game

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.
I also use 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

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