Price action points to a growth scare.

Apr 05, 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

At the end of March, developments among market internals looked like a durable rally was underway. Specifically, a positive divergence with oversold breadth metrics and excessive bearish sentiment was creating a bullish backdrop for stock prices. I also pointed out that April is one of the best months for gains from a seasonal standpoint. But in last week’s Market Mosaic, I also concluded with this:

Broadening participation and a pickup in cyclical sectors outside of semiconductors will be a key clue if the stock market can sustain a more lasting uptrend.

If anything, recent price action is delivering the opposite view. Following a string of weaker than expected economic data, price movements across the capital markets point to an economic growth scare. A drop in job openings is revealing cracks in the labor market (chart below), while the ISM reports on manufacturing and service sector activity both disappointed and missed economist estimates to the downside.

In response, cyclical sectors are selling off while safe-haven assets get a boost. Both the IYT transportation and IWM small-cap ETFs are struggling with their 200-day moving average. At the same time, gold prices are moving higher above the key $2,000 per ounce level while longer-date Treasury yields are breaking down. That includes the 10-year, which is making a decisive move below the recent 3.35% support level that you can see in the chart below. The collective message from the capital markets is that the economic lag effect of rate hikes is gaining stem.

That’s being reflected in our long watchlist as well, where great looking setups just aren’t playing out. That means I’m still carrying a heavy cash position until breakouts start to proliferate. But there have been some exceptions like with REPX that’s showing momentum after last week’s breakout, so I’m removing that stock from watch on the completed pattern. I’m also removing AVNW as it keeps drifting sideways (we can always add it back!). There are new additions to both the long and short watchlist this week.

Keep reading below for all the updates…

Long Trade Setups

SPSC

Recent price action part of a bigger basing pattern since late 2021. MACD reset at zero with relative strength (RS) line near the highs. Watching for a trendline break above the $154 level.

SKY

Failed on a breakout attempt this week over $73. A jump in volume along with RS at new highs were positive signs, but price falling back into the pattern. Will keep on watch for another week, with $75 being the new level to watch.

DRI

Consolidation pattern going back to late 2021, with more recent trading emerging from a tight range. The RS line made a new 52-week high when price broke out over $153, with the stock now back testing that level.

MPWR

Big run to start the year from around $350 back up to resistance at $535. MACD became extended on that move higher, where a tight trading range since mid-February is helping reset momentum. Looking for a breakout attempt over $535.

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. RS line still hovering near the highs.

GFS

Took another shot at the $70 this week, but RS and volume did not confirm the move. Stock is now pulling back and testing the 50-day moving average. Will keep on watch with the breakout level moving up to $72.

Short Trade Setups

UPWK

Tested the $10 support level twice since December, now turning back lower again following a MACD reset below the zero line. Looking for a close below that trigger level.

LMND

Tested the lows from December around the $13 level, with MACD in a position to support a move lower. Looking for a move below to confirm next leg of the downtrend, with the RS line at the lows.

AFRM

Still hanging around the December lows with another MACD reset under the zero line. Looking for price to close under the $8.50 level.

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

Mosaic Chart Alerts