The rally returns? Breadth and sentiment supports upside.

Aug 23, 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

Investors are anxiously awaiting Fed chair Jerome Powell’s speech at the Jackson Hole gathering of central bankers on Friday. But in the meantime, signs are aligning that stocks are ready to resume the rally. In this week’s Market Mosaic, I showed you how the combination of oversold breadth, bearish sentiment, and positive seasonal trends are converging. I also outlined here why I believe this is still a bull market, and that any selloff should be viewed as a pullback in the uptrend. Today’s price action has breadth metrics like the percent of stocks trading above their 20-day moving average and the NYSE McClellan Oscillator (chart below) turning higher from a depressed levels.

And there are other signs from the past week that investor sentiment quickly erased excessive levels of bullishness. CNN’s Fear and Greed Index has moved back into neural territory, and briefly entered the “fear” range. The AAII survey of retail investors showed a big drop in bulls as well in their last update. But the past week also showed how traders are betting with their own money. The ratio of volume in put options versus calls jumped last week to the highest level since March. That’s more evidence of a quick increase in fear among investors, which is a good thing from a contrarian standpoint. The 10-period moving average to smooth out the put/call ratio touched the highest level since the start of the year as you can see below.

I’ve started adding new positions this week on chart setups meeting my criteria. I’m after stocks with strong fundamentals that are emerging from basing patterns, and also where a strong relative strength (RS) line confirms rising momentum relative to the rest of the stock market. For this week, I’m taking TK off the list as the stock completes its chart pattern on a big increase in volume. I’m also removing MOMO from watch, which never broke out while price weakens further. That clears the way for new additions to the watchlist.

Keep reading below for all the updates…

Long Trade Setups

AIT

Made a gap over the $150 resistance level following earnings, but recently came back to fill the gap which is also around the 50-day MA. Rallying off that level and now watching for a move over $55.

MNSO

Posted about this stock on Twitter, but wanted to update here as well. After breaking above the $19.50 resistance level, the stock pulled back to retest that area as support. That created a new base and reset the MACD, with the stock now moving over $21 area.

CSPI

Trading in a choppy basing pattern since April. After trying to take out the $14.50 resistance level, stock is pulling back. Ideally the stock trades sideways and resets the MACD before trying to breakout over the $15 level.

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.

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.

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

Discussion about this post