S&P 500: Positive divergences developing.

Oct 25, 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

The week ahead will feature no shortage of headlines to drive more stock market volatility. There are 160 companies in the S&P 500 reporting earnings this week, while ongoing geopolitical tensions and a historic drawdown in bond prices are keeping investors on edge. That’s not to mention traders bracing for another rate-setting meeting from the Federal Reserve due next week. That’s driving further downside in the S&P (chart below), which today is losing the 200-day moving average (MA - green line) and support at the 4200 level following June’s breakout.

But this is when it pays to tune out the noise coming from the headlines, and focus on the market’s underlying dynamics instead. In last week’s update, I noted how oversold conditions, bearish investor sentiment and positioning, and positive seasonals are all supportive of a rally if stocks can find a bottom. That certainly remains the case, and I would now add that bullish breadth divergences are developing in the stock market across multiple time frames and oscillators. In the S&P 500 chart above, you can see the MACD and RSI made a higher low (shown with the dashed lines) relative to the last test of the 200-day MA. There are also more stocks across the market trading above their 20-day MA even though the S&P is making a lower low (chart below).

Those divergences are worth monitoring, but don’t mean much until price trends start confirming. The weak price action means breakouts are still hard to come by, so I remain in a heavy cash position. But if the positive divergences noted above can give way to an uptrend, then I’m paying close attention to stocks with solid growth fundamentals that are basing just below their 52-week high. I want to focus on trading stocks moving to new high ground ahead of the broader market, and I have a couple new additions to the watchlist this week. To make room, I’m removing THR and ZEUS as neither stock broke out from its pattern and are weakening further.

Keep reading below for all the updates…

Long Trade Setups

YELP

Trading in a bullish pennant pattern following the rally from $27 in May. Looking for a move above trendline resistance around $45. Relative strength (RS) line staying close to 52-week highs.

URNM

Uranium stocks could be basing for another move higher. The URNM uranium ETF is rebounding after pulling back to the 50-day MA. That pullback allowed the MACD to reset, while the RS line is turning higher. Watching for a breakout over $50.

STLA

Redrawing the triangle pattern after a failed breakout. MACD still in a good position and the RS line is holding near the highs. Now watching for a move over the $20 level around trendline resistance.

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. Want to see support at $26 hold on any pullback.

GHM

Trading in a sideways range after a breakaway gap over the $14.50 resistance level. RS line holding near the highs while MACD holding near the zero line. Now watching for the uptrend to resume with a breakout over $17.75.

NVGS

Price firming up in a base that extends back over a year. Making 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

The Market Mosaic

Discussion about this post