Cyclical sectors still showing relative strength.

Sep 06, 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 strength in economy, or perhaps lack thereof, is confounding investors. I covered the signs of a cooling labor market in last week’s Market Mosaic. At the same time, the ISM’s report on manufacturing activity showed contraction last month while today’s Beige Book from the Fed noted that activity in the economy and jobs market slowed in July and August. But that compares to the ISM’s services report, which at 54.5 is solidly in expansion territory and increased to the highest level in six months. At the same time, an estimate on Q3 GDP from the Fed’s Atlanta district stands at 5.6% annualized growth which is well above other economist estimates (chart below).

If there was ever a time to tune out the noise from economic reports and focus on the stock market’s price action and underlying strength, it’s now. The past couple weeks saw several positive developments with market breadth, which helped support a rebound in the S&P 500 since the end of August. But this holiday shortened week has started off on the wrong foot, with stocks pulling back over the last two days. Breadth has been bad enough to see 52-week net new lows start to expand again as you can see in the chart below.

I’m not becoming too concerned just yet with emerging signs of weakness in the average stock. Key cyclical sectors like the energy space have continued demonstrating relative strength, and is where many of the best setups are concentrated based on my process for identifying position trades. For this week, I’m removing AIT from the watchlist as the stock holds the breakout from its chart pattern. I’m also removing NAT as price weakness invalidates the setup that I was monitoring. That clears the way for a couple new additions to the watchlist this week.

Keep reading below for all the updates…

Long Trade Setups

EDU

After breaking out over $45 from a consolidation lasting six months, price is basing again just below the $59 level. MACD resetting at the zero line while the relative strength (RS) line holds near the high.

IRMD

Area of price resistance going back to last year coming into play. Stock is basing just below the $50 level in a tight range since the start of June. Watching for a breakout over $50 followed by a move to new highs.

COCO

Basing action since mid-June with resistance around the $29 level. MACD and the RS line in a good position as price turns higher to test resistance again. Looking for a breakout over that level on increasing volume.

BKR

Price recently rallying back to the highs made in early 2022, and now trading in a tight range for the past month. That recent consolidation has reset the MACD at the zero line. Stock is starting to breakout over the $37 level on increased volume.

CRAK

Refining company ETF making a series of higher lows since last September while testing resistance around $34 several times since then. Smaller drawdown following most recent test constructive for a breakout.

Recent rally came close to the highs made in early 2022. The pullback off that level making a bull flag pattern with the MACD resetting at the zero line. Watching for a move over $116 followed by a breakout to new highs. Want to see $110 hold on any pullback.

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 RS line.

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.

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