Is the stock market washed out yet?

Oct 04, 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

In last week’s Market Mosaic, I discussed how the combination of bearish investor sentiment along with oversold market breadth were creating favorable conditions for a rally to unfold. I also showed you how to use positive divergences as an early indicator that the trend could be changing. But not only have those divergences been absent, further deterioration in the average stock this week is hitting washed out levels. You can see that with the percentage of stocks trading above their 20-day moving average across the market, which today hit just 14%. That’s approaching historical extremes for this metric as I shared in the update below:

And with breadth continuing to deteriorate, the damage underneath the hood is showing up more in net new lows. This measure looks at 52-week new highs minus new lows, and is an effective way to measure the health of the market’s trend. In another sign of poor participation by the average stock, we’ve spent more time this year in a net new low regime despite the S&P 500’s 11% gain on the year as you can see below. A net new low regime has persisted since early August, with a recent expansion below -500 hitting among the worst levels since March this year.

I still believe underlying conditions can lead to a rally, but I noted last week that I’m carrying a heavy cash position. That certainly remains the case with the poor action continuing across the stock market. Even sectors that were showing relative strength like in the energy space are now being dragged lower. But this is a key benefit of position trading breakouts. Even if I’m bullish on the stock market, I ultimately let price be my guide. And that guide is keeping me on the sidelines. This week hasn’t seen any fresh breakouts on the watchlist, but I’m still removing several names as weak price action invalidates the setups. That includes VSEC, IRMD, BKR, and BG. I have several new additions in their place that are creating favorable chart patterns.

Keep reading below for all the updates…

Long Trade Setups

DUOL

Creating a resistance level around the $165 area going back to June. Most recent test follows a MACD reset at the zero line while the relative strength (RS) line is in a good position to confirm a breakout.

ELTK

Consolidating gains after a massive run back in May. Using the $10.75 resistance level as the breakout signal. Both the MACD and RS line are in a good position to support a breakout. Smaller and more volatile stock so position size accordingly.

XPRO

Not a fan of today’s price action, but will keep on watch another week. Testing resistance at the $24 level since late July. That consolidation reset the MACD at the zero line. Price recently tried to breakout but was not confirmed by the RS line.

GHM

Trading in a sideways range after a breakaway gap over the $14.50 resistance level. RS line holding near the highs while MACD starts turning higher. Now watching for the uptrend to resume with a breakout over $17.75.

EDU

After breaking out over $45 from a consolidation lasting six months, price is basing again just below the $59 level. MACD resetting at the zero line while the RS line is already making a new high.

NVGS

Putting this stock back on the watchlist as price firms up and makes a run toward resistance around the $15 level. MACD in a good position to support a breakout, with trendline resistance being tested.

Short Trade Setups

None this week!

Rules of the Game

I trade chart breakouts 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

The Market Mosaic

Mosaic Chart Alerts