Forget the Fed...focus on price action instead.

Nov 01, 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

For the second consecutive meeting, the Federal Reserve held interest rates steady at their highest level in 22 years to assess the impact to the economy and ultimately inflation. Yet during his press conference, Fed Chair Jerome Powell didn’t rule out more rate hikes if policymakers deem it necessary. But in my opinion, the bond market has already been telling you that this hiking cycle is near its end. That’s because the two-year Treasury yield (red line) crossed below the effective fed funds rate (blue line), which often historically leads changes in policy as you can see in the chart below. While the latest Fed meeting is the focal point for investors this week, the more important event is happening with earnings season and how forward estimates are evolving with another 162 companies in the S&P 500 reporting (more on that in a subsequent report).

While there are plenty of headlines to drive volatility this week, I’m staying focused on developments happening under the stock market’s surface. The good news is that several positive breadth divergences noted over the past week are becoming more pronounced. I posted here about the series of higher lows on the NYSE McClellan Oscillator since August, showing that downside momentum is easing. At the same time, the Summation Index (which is just a running tally of the oscillator values) is nearing oversold levels that have marked several major market bottoms over the past five years that I discussed in the post below:

That’s occurring as bearish investor sentiment and positive calendar seasonality are lining up favorably for stocks as well. But as I noted in Sunday’s Market Mosaic, these are conditions to be monitored as opposed to a signal. The signal ultimately comes from price action, and this is where recent trends have been dismal. The equal-weighted S&P 500 is down 3% on the year, while the Russell 2000 Index of small-caps are recently testing 2022’s bear market lows. The S&P 500 entered correction territory last week with a 10% drop from July’s peak, but is trying to find traction over the last few trading sessions. From here, I want to see the S&P recapture key support levels with a test of the 200-day moving average (MA - green line) underway. Then the Index needs to shift back to an uptrend marked by higher highs and higher lows, which has not been the case since late July as you can see below.

I also watch the action from my watchlist of setups to gauge the health of the market. Breakouts have been hard to come by, which is keeping me in a heavy cash position. But I am noticing more bases taking shape across different market sectors. As I frequently discuss, I’m after stocks with strong growth fundamentals that are basing near 52-week highs. And I prefer a breakout over resistance to be confirmed by the relative strength (RS) line making a new high along with rising volume. With that criteria in mind, I’m making an addition to the watchlist this week.

Keep reading below for all the updates…

Long Trade Setups

RNR

Basing since February while creating a resistance level around the $220 level. Attempting to breakout today, with strong volume the last two trading sessions. MACD in a good position to support a move higher.

YELP

Trading in a bullish flag pattern following the rally from $27 in May. Looking for a move above trendline resistance around $45. The RS line is 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 after a failed breakout from an earlier pattern. RS line is holding near the highs, and want to see $18 hold on any pullback. 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 but the MACD is weakening. Still 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