Mosaic Chart Alerts
Breadth worsens as the S&P 500 attempts another breakout.
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
With an agreement on the debt ceiling heading to Congress for a vote, investor attention will turn back toward incoming economic data and the path for the Federal Reserve. This Friday will feature the May jobs report, and we’ll also get an updated look at economic activity with the manufacturing ISM release. Leading indicators like the ISM’s new orders component are warning of slowing activity, while lagging indicators like payrolls and the unemployment rate suggest the economy is just fine. The market is unsure which narrative to favor, because market implied odds for another rate hike versus pause at the Fed’s next meeting is all over the place. Odds currently favor a pause as you can see in the chart below, but pointed to another hike just this morning.
Whether or not we see another rate hike, stock market breadth is continuing to worsen. While headlines around artificial intelligence lifts a select group of stocks like semiconductors, the rest of the stock market is being left behind. Here’s an updated chart below of the percent of stocks trading above their 50-day moving average. While the S&P 500 took another shot at breaking out over 4200, only 39% of stocks are in intermediate-term uptrends across the market. That stands in stark contrast to earlier in the year, when this figure was over 80% with the S&P trading at similar levels as today (shown at the arrow).
So my message and course of action remains the same. I will take breakouts that meet my criteria, but am being conservative on position sizing and taking gains more quickly when available. I’m also sitting on a heavy cash position and that will remain the case until participation in the stock market’s trend starts improving. For this week, I’m removing SKT from watch as the stock starts to break above resistance. I’m also removing AVAV as price weakness invalidates the chart pattern. And CHPT comes off the short watchlist as relative strength takes the stock above key moving averages. That also means there are a few updates to the list this week.
Keep reading below for all the updates…
Long Trade Setups
Price is currently consolidating after another test of the prior highs around $310. The MACD is resetting at the zero line while the relative strength (RS) line is holding near the highs. Impressive string of quarterly sales and earnings growth.
Tested the highs from 2021 at the $55 resistance level and now pulling back toward the 50-day moving average. The $50 level is also good support from a prior breakout. Looking for a move to new highs.
Energy exploration and production company coming up to resistance of this triangle pattern. Watching if price can move above the $75 level followed by new all-time highs.
Take this chart back farther, and you will see the stock is trying to emerge from a bottoming process. Trading in the consolidation range shown since early January with the RS line hovering near the highs. Watching for a move over $16.50.
Making a series of higher lows off the October bottom. Recently creating resistance around the $170 level, where a move above could target the prior highs.
Trading in a consolidation pattern since last June, creating an ascending triangle. Very volatile price action over the past week, but will keep on watch for a breakout over the $15 level since it’s still within the pattern.
Short Trade Setups
The $9 support level goes back to 2020. Price starting to weaken again with the MACD resetting under the zero line and the RS line turning toward the lows.
Recently testing the $38 support level from last year. The move higher following the gap in early May is resetting the MACD below the zero line, where downside momentum can support a breakdown.
Bounced off the $20 support area several times since March, but a longer-term chart shows the importance of this level going back to 2020. MACD reset under the zero line with RS hovering near the lows.
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
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.