Value sectors showing relative strength.

Aug 16, 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

With the S&P 500 continuing to pull back since late July, the stock market is finally making progress toward an oversold condition. You can see in the chart below that the S&P has dropped below the 50-day moving average (black line) for the first time since March while the MACD pulls back to the zero line after getting extended on the breakout over 4200 (dashed line). At the same time, the percent of stocks across the market trading above their 20-day moving average now sits at 25%, which is the lowest level in five months. Several other measures of breadth are hitting oversold levels, while excessive bullish sentiment is being cleared out.

The dynamics underneath the hood also shows a rotation taking place since the S&P topped in July. The pull back has coincided with a jump in interest rates, with the 10-year Treasury yield recently taking out an important resistance level around 4.20%. As I wrote about in this week’s Market Mosaic, growth and technology stocks dominate the S&P’s top holdings and those are the ones more susceptible to rising rates. At the same time value sectors have been holding up well, especially in the commodity- and energy-linked sectors. The chart below shows a price ratio of value versus growth stocks, where the falling line for most of 2023 demonstrates the leadership in growth stocks this year. But since mid-July, the line is turning higher in favor of value.

As I’ve mentioned the past couple weeks, I’m still holding a large cash position as I wait patiently for new breakout setups to develop. And with the relative strength in value shares, it’s no surprise that stocks in related sectors are starting to dominate my watchlist. For this week, I’m removing AIT from watch following the stock’s breakout to complete the pattern. I’m also removing ONON and HGBL as price weakness invalidates their chart setup. That means I have several new additions to the list this week.

Keep reading below for all the updates…

Long Trade Setups

CSPI

Trading in a choppy basing pattern since April, and taking out the $14.50 resistance level in today’s session. Would prefer to see the relative strength (RS) line confirming with new highs, but recent gains stand out against the weaker market environment.

NAT

Recently testing the $4.50 resistance level and pulling back, which is resetting the MACD at zero. RS line also in a good position on a breakout. Smaller-cap and volatile stock so position size accordingly. **Earnings due tomorrow.**

Testing the $7 area several times since March. More recent price action trading in a very tight range just below that breakout level. Both the MACD and RS line in a good position to support a breakout.

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, while I would like to see more improvement in the RS line.

FRO

Shipping stock returning to the 52-week high just below $18. My ideal scenario is that price bases further just below resistance and resets the MACD before attempting to breakout.

SQSP

Working higher after a long bottoming base from last year. More recent consolidation since April keeps testing resistance at around the $33 level. MACD is starting to weaken on this setup but the RS line still near the highs.

Massive consolidation base going back nearly two years. Watching for a move over $45, followed by a test of the prior highs around $52. Would prefer to see price support hold at the $40 level on the recent pullback.

MOMO

Consolidating since January as part of an overall bottoming base. Looking for a move over $10-11 to signal the start of the next move higher. Recent MACD reset at zero is constructive as well.

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

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