Conditions favoring a stock market rally.

Sep 27, 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

After breaking out over the 4.34% level, the relentless increase in the 10-year Treasury yield is pressuring stock market valuations. Closing the day at 4.62%, the 10-year is now at the highest level in 16 years. Meanwhile, the growing prospect of a government shutdown is weighing on share prices as well. But the ongoing selloff since the S&P 500 peaked in late July is creating a favorable combination of oversold breadth along with bearish sentiment. On breadth, the percent of stocks trading above their 20-day moving average (MA) is now at the lowest level since the S&P 500’s March low as you can see below.

I noted in last week’s Market Mosaic that the percent of stocks across the market trading above their 50-day MA is hitting historically low levels at around 20%, while the McClellan Oscillator has dipped back into oversold territory as well. At the same time, a quick jump in bearish sentiment is creating conditions to support a rally. CNN’s Fear & Greed Index (chart below) has entered extreme fear territory for the first time since March. That combination of oversold conditions and increasingly bearish sentiment are developing just as the S&P 500 nears a more favorable period for seasonality.

I’m still carrying a heavy cash position until more chart setups start playing out, but I’ve recently noted the relative strength and setups across the energy and commodity space. That remains the case, as evidenced by FRO’s breakout from its chart pattern. So that stock comes off the watchlist, while I’m removing LI as well following price weakness that’s invalidating the setup for now. That means I have a couple new additions for this week.

Keep reading below for all the updates…

Long Trade Setups

XPRO

Trading is a tight range since late July after testing resistance at the $24 level. That consolidation reset the MACD at the zero line, with price now trying to breakout. The relative strength (RS) line is also close to a 52-week high.

VSEC

Creating an ascending triangle pattern since March with resistance at $59. A breakout could test the prior highs from 2021 just above at $63, setting up a move to new all time highs.

GHM

Trading in a sideways range after a breakaway gap over the $14.50 resistance level. RS line holding near the highs while MACD resets. Now watching for the uptrend to resume with a breakout over $17.75.

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 RS line is already making a new high.

IRMD

Area of price resistance going back to last year coming into play. Disappointing price action continues, but will keep on watch as long as support around $43.50 holds. Watching for a breakout over $50 followed by a move to new highs.

BKR

Price rallying back to the highs made in early 2022, and now turning higher after testing the 50-day MA on the recent pullback. That consolidation has reset the MACD at the zero line. Watching for a breakout over the $37 level on increasing volume.

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, with trendline resistance now starting to give way.

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

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