Expansion in breakouts, but breadth divergences remain.

Jan 24, 2024

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 S&P 500 is continuing its advance after breaking out to new all-time highs last Friday. As I noted in this week’s Market Mosaic, one positive feature of the rally are the sectors leading the way higher or potentially setting up for new highs. That includes semiconductor stocks, which are sustaining their momentum following earnings reports from companies like Taiwan Semiconductor (TSM) and ASML Holding (ASML). Transportation stocks (IYT) could be the next cyclical sector preparing for a move to new highs. The daily chart is testing the 50-day moving average (MA - black line) recently, resetting the MACD at zero while the RSI has held above 40. Price is now turning higher to once again test the resistance area going back to 2021.

While leadership in cyclical sectors is favorable, breadth across the broader market has been a concern on this breakout. The McClellan Oscillator, which looks at the trailing difference between advancing and declining stocks on the NYSE, has remained below zero since late December. On the day the S&P 500 moved to new highs last week, net new 52-week highs across the major stock exchanges actually finished the day in negative territory (chart below). The average stock has been firming up more this week, with net new highs crossing back into positive territory over the last few trading sessions.

In order for breadth expansion to continue, I’m watching the Russell 2000 Index of small-cap stocks. The chart below shows the IWM ETF that tracks the Russell. After briefly moving above resistance around the $196 level in December, small-caps suffered a quick 7.5% pullback reflecting the recent weakness in the average stock. That pullback found support at the 50-day MA (black line), while the MACD also reset at the zero line. If price can climb back above the late December high around $205, that should help clear up many of the breadth divergences recently appearing.

If chip stocks, transports, and small-caps can all march to the same beat, then that’s a great sign the rally can continue. Another positive sign has been the feedback from our watchlist, with many setups breaking out and completing their pattern. Over the past week, that includes SPOT, MELI, ARCH, SMCI, and RMBS. If some of the existing breadth divergences is masking weakness under the market’s hood, then the follow through from these breakouts will be very telling in the near-term. With the turnover in this week’s watchlist, I have several new additions.

Keep reading below for all the updates…

Long Trade Setups

CAT

Moved out of a larger basing pattern over the $280 level, and recently back testing that area as support. Creating a bull flag pattern while doing so, which also reset the MACD at the zero line. Now watching for a move over $300.

ERJ

Recently testing the $20 level, which is resistance from 2021. Pulling back from that level while also finding support near the $16.50 area along with a MACD reset. Watching for a move over $20 with confirmation from the relative strength (RS) line.

IOT

Consolidating gains since the start of December after the breakout to new highs over the $30 level. The RS line has weakened more than ideal, but support at the $30 level is being respected. Looking a move to new highs over $35.

Since peaking back in 2021, the chart has the appearance of a large saucer-type pattern. Price recently nearing the prior high at $140 and now pulling back. That’s resetting the MACD while price holds support at $115. Watching for a move to new highs over $140.

HUBS

Testing the $580-585 area several times since peaking at that level in July. Recent MACD reset at the zero line, while the RS line is holding up well. A breakout over $585 could potentially target the prior highs from 2021 around $850.

APP

Trading in a range since September with resistance at the $44 level. Notice the MACD making higher lows on each pullback in that range. Would prefer the see the RS line strengthen before attempting to breakout.

MDB

Basing since July while creating a resistance level around $435. Part of a larger pattern going back to 2022 with a similar resistance level. Recent MACD drop below the zero line not ideal, but can recover. A breakout can target the prior highs around $590.

THR

Broke out over $29 from an ascending triangle at the start of November. Now basing above that pattern and back testing support. Watching for the uptrend to resume with a move above $33.

GES

Keeping on the watchlist for now as long as support at $20 holds. Still watching resistance at $24, 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.

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 X: @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.

The Market Mosaic

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