Stocks dive on the Fed's hawkish pause.

Sep 20, 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

Following their latest meeting on monetary policy, the Federal Reserve left short-term interest rates unchanged as widely expected. Comments regarding the outlook and projected rate path going forward was more important coming into this meeting. To that end, the message on keeping rates higher for longer while holding off on further hikes to assess the economic impact delivered a “hawkish pause”. In the wake of the meeting, I’m closely following the action in the 2-year Treasury yield (blue line) which tends to lead changes in the fed funds rate (red line) as you can see in the chart below. Despite the hawkish tone, the bond market is still signaling that rate hikes are over.

Stocks ultimately finished lower following the decision and Fed chair Powell’s press conference. But in reality, September living up to reputation for poor returns. Calendar seasonality for the S&P 500 over the past 20 years points to a rough stretch for returns from now until about mid-October, and price action in the more speculative corners of the market points to growing bearishness among investors. You can see that with the IWO small-cap growth ETF below, which is now slicing through the 200-day moving average (green line) after failing on its breakout attempt from an ascending triangle pattern.

While growth corners of the market are struggling for traction in the wake of high and rising interest rates on both the long- and short-end, cyclical areas are continuing to hold up better overall. But regardless of sector, I’m simply watching for stocks showing relative strength while setting up in sound basing patterns. Those patterns continue to develop for many of our watchlist names with updates below. For this week, I’m removing TX from watch as it continues trading sideways in order to make room for a better setup.

Keep reading below for all the updates…

Long Trade Setups

FRO

The stock recently made an attempt to take out the March high, but the MACD was already extended and price has pulled back since the start of the month. But that reset momentum with the stock now setting up a breakout over $18.

Recently tested the highs from 2020 around the $45 level then pulled back. That’s resetting the MACD while the relative strength (RS) line continues to hold up. Looking for a breakout over $45 on rising volume with the RS line at a new 52-week high.

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 holds near the high.

IRMD

Area of price resistance going back to last year coming into play. Disappointing price action this week, 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 trading in a tight range for the past month. That recent consolidation has reset the MACD at the zero line. Watching for a breakout over the $37 level on increased 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, while I would like to see more improvement in the RS line.

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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