Market turmoil is forcing a Fed pivot.

Mar 15, 2023

Welcome back to Mosaic Chart Alerts!

In this newsletter, I’ll focus on the best 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

Ranking among the largest bank failures in U.S. history, the consequences of Silicon Valley Bank and Signature Bank’s closure are still reverberating through the global capital markets. Historic movements are happening all over the place, with the KRE regional bank ETF plunging 16% last week. Only the pandemic and financial crisis saw a larger weekly drawdown, while other big banks like First Republic (FRC) fell 73% in just three days. At the same time, a flight to quality has sent interest rates plunging on U.S. Treasury securities. The most notable action is taking place in the 2-year Treasury yield, which has fallen to 4% compared to 5% just a week ago. It’s also notable because the 2-year yield (red line) tends to lead the fed funds rate (blue line) as you can see in the chart below.

That means there may be an end in sight for the Federal Reserve’s rate hiking campaign. After all, market implied odds now slightly favor a pause at next week’s Fed meeting on interest rates. The bad news is that past pauses preceded rapid selloffs in the stock market (as you can see in the chart below). That’s because the Fed stops hiking rates when it’s clear they have gone too far and are starting to break something in the financial system. In today’s case, rising interest rates are leading to massive losses on bonds that banks hold in their own portfolios.

Regardless of what happens, I reiterated one important aspect of trading breakouts in last week’s Market Mosaic. You naturally stay cash-heavy when market conditions are tough, and now is one of those times. As you would expect, there have been no recent breakouts among our watchlist of long setups. But I will note those setups remain valid as most stocks on watch continue trading above key moving averages. We have seen action pick up with our short watchlist, where I’m removing RUN, MKC, and TSN following breakdowns from their chart setups. That also means I’m adding several new positions to the short watchlist.

Keep reading below for all the updates…

Long Trade Setups

NSP

Ran up to test the $127 resistance level. Momentum became extended on that gain with the MACD now resetting, which helps the breakout setup. Relative strength (RS) line hovering near the highs.

SKYT

Small-cap semiconductor stock holding key moving averages on the recent pullback. Looking for a move over $15, which is price and trendline resistance. A more volatile stock so position size accordingly on a breakout.

SEDG

Watching trendline resistance now around the $340 area. Looking for additional confirmation with a move above the prior highs around $370 and the RS line moving to new highs.

GFS

Recent IPO that tried to break above $70 resistance and failed. The pullback is resetting the MACD at the zero line while the RS line is hovering near the highs. Looking for another attempt at $70 that can test the prior high at $80.

Building products stock that ran up to prior resistance highs around $105. The recent pullback is deeper than I prefer, and is taking out key moving averages. Will keep on watch one more week as price support at $90 is being tested.

AVNW

Massive consolidation pattern in the works for nearly two years. Recent move lower is filling the gap at the $33 level. Seeing the MACD reset closer to zero before trying to breakout over the $40 level.

Short Trade Setups

LMND

Currently testing the lows from December around the $13 level. Looking for a move below to confirm next leg of the downtrend, with the RS line at the lows.

AFRM

Trading back at the December lows following a recent MACD reset under the zero line. Looking for price to close under the $8.50 level.

NOVA

Starting to break below a bearish triangle continuation pattern, where $16 is the trigger level. Want to see RS confirm by making new lows.

SPWR

Starting to break below the $14 support level, which was tested frequently. MACD and RS line still in position to support a move lower.

Rules of the Game

If you haven’t noticed yet, I trade breakouts! I trade 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.
New Filter: After extensive back testing and live implementation, I am adding new highs on 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

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