Key stock market sectors are breaking down.

Apr 26, 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

Despite a round of better than expected earnings reports by corporate titans like Microsoft and Google parent Alphabet, the worsening breadth picture is finally catching up to the S&P 500. I discussed in last week’s Market Mosaic how a combination of lagging participation by the average stocks and bullish sentiment were threatening the market’s rally since mid-March. Not only is the S&P breaking down from the ascending triangle pattern that we’ve been tracking, the action in cyclical sectors continues to paint a worrisome picture. Both small-cap and transportation ETFs are breaking down from bearish rising wedge patterns. Here’s the IWM small-cap ETF below with the rising wedge pattern, where the breakdown has small-caps on the path to test their bear market lows.

Between earnings-related catalysts, an upcoming Federal Reserve meeting, and ongoing uncertainty over the debt ceiling and prospect of a U.S. default, you should expect plenty of volatility in the coming weeks. But to know if a pullback in the stock market could become something worse, I’m following the action in the high yield segment of the bond market. Junk bonds can provide a reliable signal if concerns over the economic outlook or capital market stress is becoming systemic. So I’m tracking the pattern below in the JNK high yield ETF, where a breakdown through trendline support at $90 would send a very negative message to the stock market.

Given the ongoing difficult trading environment and lack of follow through on breakout setups, I continue to mostly sit on the sidelines with a large cash position. If anything, it’s the setups on the short side that are starting to play out. We’ve seen that with LMND, which is coming off the watchlist as the pattern completes. UPWK is also in the early stages of breaking support, but I will monitor that setup for another week. I’m also removing SPSC and DRI from the long watchlist as recent trading invalidates their setups. That means there are several new additions to the list this week.

Keep reading below for all the updates…

Long Trade Setups

LTH

Testing resistance just under the $20 level. Would have preferred to see the stock spend more time forming the right side of the base, but the relative strength (RS) is notable in this market.

SFM

Turning back up toward the $35 resistance level after a MACD reset. Progressively smaller pullbacks inside the pattern. Want to see the RS line confirm any breakout by creating a new high.

NVGS

Trading in a consolidation pattern since last June, creating an ascending triangle. Watching for a breakout over the $15 level, with the MACD and RS line in a good position.

PODD

On the verge of taking out resistance going back to the 2021 peak around the $325 level. Looking for an increase in volume and RS line to new highs on a breakout.

HIMS

Shorter-term basing pattern compared to what I usually target, but also emerging from a bottoming process. Now looking for a close over the $12 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, with $75 now being the level to watch.

Short Trade Setups

GNRC

Took out minor support today at the $98 level, which could see the stock take out more significant support at the $90 level. RS line already making a new low on this move.

UPWK

Created support at the $10 level going back to December. Now breaking below that support area which follows a MACD reset below the zero line.

AFRM

Still hanging around the December lows with another MACD reset under the zero line, which is now making a negative crossover. Looking for price to close under the $8.50 level.

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

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