Mosaic Chart Alerts
Stocks pulling back at key resistance levels.
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
Frothy investor sentiment and extended price momentum is finally catching up to the stock market. In last week’s chart update, I shared how various measures of bullishness among retail traders and professionals alike are reaching historically elevated levels. At the same time, measures of price momentum are signaling the potential for mean-reversion lower just as the S&P 500 is testing a key level. You can see in the chart below that the S&P is stalling out at the prior highs from late 2021 around 4,800. At the same time, momentum as measured by the MACD in the middle panel is extended to the upside while the RSI in the bottom panel is showing a negative divergence on the S&P’s most recent higher high. In an ideal scenario for the bulls, the S&P sees a basing period that resets the MACD at the zero line while the RSI holds above 40, which is a common support level in a bull trend. That’s the type of setup that can support an S&P breakout to new highs.
While this is a logical spot to see a pullback, for now I remain bullish on the intermediate-term picture and expect downside to be relatively contained. That’s because participation in the uptrend since late October has been stronger than at any point in years based on several measures. Last month, daily net new 52-week highs across the market saw their best level since May 2021. And the percent of stocks trading above their 50-day moving average, which is a useful gauge of intermediate-term trend, hit the best level since early 2021 as you can see in the chart below. The bearish take is that the percent of stocks above their 50-day is highlighting an overbought market, but historically I’ve found extensions above 85% signal the start of meaningful uptrends.
Regardless of what I think about the current market backdrop, I ultimately follow price action for trading setups. One key feature to watch now is with stocks showing relative strength. Those stocks that can keep trading sideways or higher even when the indexes are weakening will show up in their relative strength (RS) line, which is the green line in the lower panel of my charts. On price breakouts, I prefer to see the RS line at 52-week highs to signal strong momentum out of basing patterns. For stocks showing weak price action in a broader market pullback, that’s a sign it’s time to scout better opportunities. That’s why I’m removing SYM and URBN from the watchlist this week as both stocks weaken further, which also clears the way for new additions.
Keep reading below for all the updates…
Long Trade Setups
Coal stocks broadly showing good relative strength. Creating a resistance level near $175 since September. Recent MACD reset at the zero line with price still holding near the highs.
Broke out of a larger basing pattern back in October and now forming another base after back testing support at $45. Strong price action today on rising volume, with a new resistance level to watch at $55.
Basing since July while creating a resistance level around $435. Part of a larger pattern going back to 2022 with a similar resistance level. Recent MACD reset at the zero line. A breakout can target the prior highs around $590.
Broke out over $29 from an ascending triangle at the start of November. Now basing above that pattern and back testing support. Watching for the uptrend to resume with a move above $33.
Daily chart creating a resistance level at $500 since August as it consolidates the prior move higher. Recent MACD reset at the zero line as the $500 level is recently being tested again.
Recently testing resistance at the prior high around $70. MACD extended on that test, now a small retracement of the rally since October. That's resetting the MACD back at the zero line. Now watching for a breakout over $70 with the RS line at new highs.
Trading in a basing pattern since mid-June, with a failed breakout attempt in September. Has traded in a similar range since then, with resistance around the $30 level. The MACD is weakening further, but will keep on watch as long as support around $25 holds.
Made a quick move higher off support around $34. My ideal trade setup is price tests resistance around $45 then does a small retracement of the rally. Look for the MACD to reset at zero in that scenario, followed by an attempt to breakout over $45.
Pulled back after reporting earnings. Will keep on the watchlist for now as long as support at $20 holds. Still watching resistance at $24, which is a level tested several times going back to 2021. Series of higher lows since last October’s bottom. A breakout could target the prior high near $29.
Uranium stocks could be basing for another move higher. The URNM uranium ETF is recently pulling back after testing resistance again at $50. Now seeing another MACD reset which can help a breakout attempt.
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
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 post.