Forget CPI...follow the "Big 3" instead.

Jul 12, 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 incoming reports on consumer and producer price indexes this week, investor attention is focused on inflation and the implications for monetary policy. And today delivered much needed good news on that front. The Consumer Price Index (CPI) showed an increase of 3.0% in June compared to last year (chart below from Bloomberg), which was less than expected and is the smallest gain since March 2021. But it was the core measure that strips out food and energy prices that helped spark today’s stock market rally.

It’s the first time in 17 months that the core CPI was below 5%, generating optimism that inflation won’t be as “sticky” as feared. The positive news on the inflation front sent shorter-dated Treasury yields tumbling, where I’m closely following the action in the 2-year yield. That’s because the 2-year tends to lead changes in the Federal Reserve’s monetary policy. The chart below shows the feds funds rate (blue line) along with the 2-year yield (red line), where the drop below fed funds is signaling that this hiking cycle should be about finished.

While I’m following the good news on the inflation front, I’m even more excited by action in my “Big 3” for risk sentiment. I overviewed how I’m watching three ETFs tracking the small-cap growth space here, and how each is emerging from bottoming bases. The small-cap growth ETF (IWO) is a great example of positive breakouts in action as you can see in the chart below. After bottoming in June last year, IWO made a series of high lows while encountering resistance around the $245 level. That resistance is being taken out this week. Perhaps disinflation and the end of the tightening cycle is a catalyst, but I also recently outlined conditions in place that could keep driving the rally.

Positive action in speculative segments of the stock market, broadening participation, and rallying cyclical sectors are all great signs that the rally can continue. And with the expansion in breakouts happening, this is where it’s critical to do your homework and have a trade plan in place. I’m still encouraged by the action in cyclical sectors, while I’m also focusing on adding more IPO bases to my watchlist due to the improvement in small-cap growth. To make room on the watchlist, I’m removing WFRD and HXL as both stocks breakout and complete their pattern.

Keep reading below for all the updates…

Long Trade Setups

LTH

This has been a watchlist stock in the past. A series of higher lows since November has brought price back to the post-IPO high around the $22 level. Today’s action taking out that level with the relative strength (RS) line near new highs.

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.

ENVA

After spiking to new highs in early February, the stock has retraced the gains from the last base breakout. Now price is hovering near the highs with the RS line in a good position. Would prefer to see a bit more sideways action to reset the MACD before a breakout attempt over $55.

MPWR

Making a series of higher lows off the October bottom while finding resistance around the $540 level each time. Breaking out over that level today, which could target the prior highs around $570 for a bigger move.

IOT

Price rallied to the post-IPO highs around $30. With the recent pullback from that level, the MACD is resetting at zero with the RS line staying near the highs. A breakout over $30 with the RS line at a new high and the MACD turning up from zero is my ideal trade scenario.

NABL

Another recent IPO testing the prior highs around $15.50. Prefer to see the stock hold the $14 support level while it consolidates. Watching for a breakout over $15.50 with the RS line confirming to new highs.

SKX

Tested the highs from 2021 at the $55 resistance level and pulled back toward the 50-day moving average. The $50 level is also good support from a prior breakout. Looking for a move to new highs, and don’t want to see $50 give way.

CIVI

Energy exploration and production company starting to move out of this triangle pattern. Watching if price can move above the $72 level followed by new all-time highs.

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

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