CPI incoming as relative strength shifts to energy.

Aug 09, 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

This week’s main event takes place with the latest Consumer Price Index (CPI) report due Thursday morning. July’s year-over-year headline figure is expected at 3.3% while the core measure stripping out food and energy is expected to be at 4.8%. Regardless of any headline volatility around the figure, the stock market is still working off overbought conditions. In last week’s Market Mosaic, I highlighted three breadth metrics that I’m tracking for signs that stocks are becoming oversold and the rally can resume. The percent of stocks trading above their 20-day moving average is now down to 41%, which is the high end of my oversold target level of 30-40%.

Looking underneath the hood on the pullback since late July reveals some interesting trends. First, the rally in small-cap growth stocks is starting to fizzle out. I’ve previously written about tracking small-cap growth ETFs and their patterns to gauge risk sentiment toward that corner of the market. We’re now seeing the prospect of failed breakouts from bottoming bases, like with the IWO small-cap growth ETF that you can see in the chart below. While it’s not a good sign for IWO to fall back into its basing pattern, it has yet to violate the trend of higher highs and higher lows since October.

But on the other side, relative strength in the energy and commodity space is clearly showing. These areas of the market had been laggards this year following a stellar 2022, but it appears those consolidations have played out and uptrends are resuming. That also means energy and commodity sectors are becoming a bigger focus for my watchlist. For now, I’m still sitting on a heavy cash position as I wait for the next round of breakout setups to play out. CIVI is making good progress out of its chart pattern, so that stock comes off the list. Weakness among growth names is dragging IOT lower, so I’m removing that stock from watch for now. That means there are a couple new additions this week.

Keep reading below for all the updates…

Long Trade Setups

NVGS

Putting this stock back on the watchlist as price firms up and makes a run toward resistance around the $15 level. MACD in a good position to support a breakout, while I would like to see more improvement in the relative strength (RS) line.

FRO

Shipping stock returning to the 52-week high just below $18. My ideal scenario is that price bases further just below resistance and resets the MACD before attempting to breakout.

SQSP

Working higher after a long bottoming base from last year. More recent consolidation since April keeps testing resistance at around the $33 level. MACD turning higher from zero with the RS line near the highs.

AIT

Consolidating since making a new high in early February. The stock is recently trading at the high end of the consolidation range and tested resistance at around the $147 level. Looking for a breakout to new highs.

ONON

The basing pattern is not as tight as I prefer, but similar to an ascending triangle going back to the May peak. Choppy price action since attempting to breakout a couple weeks ago, but now starting to firm up on the move over $35.

Massive consolidation base going back nearly two years. Watching for a move over $45, followed by a test of the prior highs around $52. Would prefer to see price support hold at the $40 level on the recent pullback.

HGBL

Took this chart back to 2020 to show the importance of the $4 area. That prior high was tested recently, with the stock now pulling back since late June. That’s resetting the MACD at the zero line, which is still trying to turn higher. Looking for a move over $4.15. More volatile small-cap name, so position size accordingly.

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.

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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