Mosaic Chart Alerts
The stock market's character change.
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
The stock market is experiencing a character change ever since Friday’s payrolls report. The S&P 500 has been opening weak but closing strong, while the average stock is finally seeing outperformance. Those are the hallmarks of a bull market trend. And if there was a data point that could take the market back lower, it was today’s producer inflation figures. The September Producer Price Index (PPI - chart below) increased by 2.2% compared to last year versus expectations for a 1.6% rise. That’s the highest headline figure since April, while the core measure that strips out food and energy prices jumped 2.7% versus estimates for 2.3%
But investors are shrugging off today’s inflation news, while there’s still fuel left for an oversold bounce to continue. As I’ve recently highlighted, breadth on multiple time frames was reaching extremely oversold levels just as investor sentiment became overly bearish. Calendar seasonality is finally becoming a tailwind, while positioning among certain investor groups could lead to more buying pressure. The chart below (h/t
) shows how commodity trading advisors (CTAs) are shorting a record amount of domestic equity futures. This group tends to deploy trend following approaches, where a stabilizing market could force an unwind with CTAs buying to cover their short positions.
Now the question turns to the durability of the rally, or if it’s just an oversold bounce in the downtrend since late July. If the stock market is embarking on a new uptrend phase, then I want to see evidence that institutional investors are getting more involved. I’m tracking advancing stocks relative to declining ones, or the volume in advancers compared to decliners. Breadth thrusts are extreme readings in such measures, and point to panic buying by institutions. The chart below shows the ratio of advancing versus declining stocks on the NYSE. I want to see a figure like June’s 10/1 reading (circled) that occurred as the S&P 500 broke out over 4200.
I’ve started adding a few new positions over the past week in stocks that are breaking out of bases and seeing confirmation with their relative strength (RS) line at 52-week highs. There are several changes to the watchlist this week, with DUOL and EDU coming off as they complete their patterns. I’m also removing XPRO as it shows relative price weakness, and ELTK due to volatility around its breakout attempt. That clears the way for several new additions to this week’s watchlist.
Keep reading below for all the updates…
Long Trade Setups
STLA
Trading in a triangle pattern since attempting new highs back in July. Today’s price action taking out trendline resistance at the $20 level, while it’s notable that the RS line is already making a new high.
THR
Creating an ascending triangle since late July, with a resistance level around $29. The MACD is curling higher after resetting at the zero line, while the RS line has stayed near the 52-week high.
ZEUS
Consolidating prior gains since March and recently testing resistance around the $57 level. Series of higher lows since May, with smaller retracements on each pullback to trendline support. Watching for a breakout to new highs.
DBX
Progressing through a sideways trading range over the past three months, creating a resistance level around $28. Looking for a breakout over that level, which could target the prior highs near $33.
GHM
Trading in a sideways range after a breakaway gap over the $14.50 resistance level. RS line holding near the highs while MACD starts turning higher. Now watching for the uptrend to resume with a breakout over $17.75.
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, 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.