Mosaic Chart Alerts
Bullish breadth and breakouts.
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
A double dose of good news on inflation sent stocks soaring this week. The most recent Consumer Price Index (CPI) for October showed the headline figure up 3.2% from a year ago, while the core measure that excludes food and energy increased 4.0% (CPI chart below). While both figures remain above the Federal Reserve’s inflation target of 2%, the increase was less than expected and continues a trend of disinflation. And today’s Producer Price Index (PPI) suggests that CPI will keep moderating, with October’s PPI rising just 1.3% compared to last year. Investors interpreted the news as the strongest signal yet that the Federal Reserve is finished hiking interest rates.
Stocks rose sharply in response. But if you were waiting for the headlines to adopt a more positive outlook on the stock market, then you missed key clues weeks ago that conditions for a rally were aligning. Positive breadth divergences across multiple time frames, extremely bearish investor sentiment, and a favorable seasonal period all combined to create a strong backdrop for stocks. And as I discussed here in The Market Mosaic, the last signal to confirm a more durable rally would come from breadth thrusts. That signals institutional investors are scrambling to buy shares, with their purchasing power necessary to sustain market uptrends. Much had been made of the Zweig Breadth Thrust, but I prefer additional confirmation with a strong daily reading in the ratio of advancing stocks to declining ones. And we saw that with Tuesday’s 13.6 to 1 ratio of advancers to decliners on the NYSE, which is the strongest reading since last October’s bear market bottom (chart below).
There are other notable positives emerging this week as well. Slowing inflation sent longer-dated yields tumbling, with the 10-year Treasury yield now at 4.55% after touching 5.0% just a couple weeks ago. The dollar index is falling as well, which has bullish implications for commodities, international stocks, and corporate earnings. And small-cap stocks are reversing higher off key support levels. The last two trading sessions has seen the Russell 2000 climb over 5% and is now testing the 200-day moving average (MA - green line in the chart below). All three developments are positives for the “risk on” trade.
With the surge in stocks this week, it’s key to stay disciplined and add new positions that skew reward and risk in your favor as much as possible. That means not giving in to fear of missing out, and avoid adding new position trades that are too far past proper entry points. If we see a rally marked by broadening participation, which does seem to be the case right now, then there will be plenty of trading opportunities ahead. For this week, I’m removing AVGO, META, and STLA from the watchlist as all three breakout and complete their patterns. That means we have room for several new trade ideas this week.
Keep reading below for all the updates…
Long Trade Setups
Price starting to rally after testing the post-IPO highs around $45. In an ideal setup, price tests resistance again and trades sideways to reset the MACD at the zero line. That sets up a breakout over $45, which should see rising volume and confirmation with the relative strength (RS) line at new highs.
If gold prices can breakout, AGI is a top miner on my list. The MACD is trying to reset at the zero line. Watching for a breakout over $13.50 confirmed by the RS line to new highs.
Coming back up to resistance at $25, 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.
Creating a resistance level just below $230 at going back to March. Price also making a series of higher lows since July. MACD turning up from the zero line and a recent cluster of large volume. Prefer to see the RS line make a 52-week high on a breakout.
Basing since February while creating a resistance level around the $220 area. Attempted to breakout last week although the RS line did not confirm. MACD now resetting at the zero line. Want to see $200 hold on any pullback.
Trading in a bullish flag pattern following the rally from $27 in May. Looking for a move above trendline resistance around $45. The RS line is staying close to 52-week highs.
Uranium stocks could be basing for another move higher. The URNM uranium ETF is trying to rebound after pulling back to the 50-day MA. That pullback allowed the MACD to reset. Watching for a breakout over $50 with the RS line at new highs.
Trading in a sideways range after a breakaway gap over the $14.50 resistance level. RS line holding near the highs with the MACD now turning higher. Starting to breakout over $17.75 with today’s move on huge volume.
Price firming up in a base that extends back over a year. Making a run toward resistance around the $15 level. MACD in a good position to support a breakout, with trendline resistance being tested recently.
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.