Mosaic Chart Alerts
The Fed slams the brakes on the rally.
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
A hawkish tone from the Federal Reserve is slamming the brakes on the S&P 500’s rally. Since the start of December, a big catalyst for the stock market’s gains were signs that even hawkish members of the Fed were pleased with progress on inflation. That seemed to open the door to rate cuts as soon as the Fed’s March meeting. But over the past couple weeks, various speakers from the Fed have made an effort to push out expectations on the timing of that first rate cut. And today’s Fed meeting statement and press conference with Chairman Jerome Powell solidified that stance. You can see in the chart below that market-implied odds for a rate cut at the next meeting in March are down to 35%, which stood at 73% a month ago.
Despite the volatility in stocks around the Fed meeting and earnings announcements from market bellwethers like Microsoft and Google, I wrote in this week’s Market Mosaic that it’s important to tune out the noise and instead following the action in sectors sensitive to changing investor sentiment. That includes the dollar, small-cap growth stocks, and high yield bonds. Even with today’s drop across the market, those three sectors are still trading in their respective ranges that I highlighted over the weekend. I still believe a breakout or breakdown from the levels I discussed will deliver a big clue about the short-term direction of the market. I would also add the VIX Index in the chart below to that list, where a move above the 15 level could be a trigger to watch for more near-term downside.
Despite today’s setback, this has remained a more constructive environment for trading breakout setups. Although below December’s level, net new 52-week highs have mostly stayed in positive territory since mid-November. The key right now is to not chase stocks that have already made a big run from their basing pattern, and to be on the lookout for new bases forming if the markets do keep pulling back. I’m also keeping stop losses tight, and do not want to see failed breakouts where price falls back into a base (see APP below). For this week, I’m removing CAT and HUBS as both stocks are breaking out to complete their pattern. That clears the way for a couple new additions.
Keep reading below for all the updates…
Long Trade Setups
RCL
Basing just below the $130 level over the past month following a big run that started in October. The pullback has been shallow, with the relative strength (RS) line holding near the highs while the MACD has reset. Watching for a move over $130.
STNE
Starting to emerge from a bottoming base going back two years. Took out resistance at $15 and now consolidating the gains. Trading sideways since late December, with a new resistance level near the $19 level.
ERJ
Recently testing the $20 level, which is resistance from 2021. Pulling back from that level while also finding support near the $16.50 area along with a MACD reset. Watching for a move over $20 with confirmation from the RS line.
IOT
Consolidating gains since the start of December after the breakout to new highs over the $30 level. The RS line has weakened more than ideal, but support at the $30 level is being respected. Looking a move to new highs over $35.
BX
Since peaking back in 2021, the chart has the appearance of a large saucer-type pattern. Price recently nearing the prior high at $140 and now pulling back. That’s resetting the MACD while price holds support at $115. Watching for a move to new highs over $140.
APP
Trading in a range since September with resistance at the $45 level. The MACD making higher lows on each pullback in that range. Notice the false breakout this week, which was not confirmed by the RS line (a great example of how I filter on RS). Need to see the RS line strengthen before attempting to breakout.
MDB
Basing since July while creating a resistance level around $435. Part of a larger pattern going back to 2022 with a similar resistance level. Recent MACD drop below the zero line not ideal, but is recovering. A breakout can target the prior highs around $590.
THR
Broke out over $29 from an ascending triangle at the start of November. Now basing above that pattern and back testing support. Watching for the uptrend to resume with a move above $33.
GES
Keeping on the watchlist for now as long as support at $20 holds. Still watching resistance at $24, which is a level tested several times going back to 2021. Series of higher lows since last October’s bottom. A breakout could target the prior high near $29.
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 X: @mosaicassetco
Disclaimer: these are not recommendations and just my thoughts and opinions…do your own due diligence! I may hold a position in the securities mentioned in this post.
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