The Market Mosaic 6.26.22
Longs can work, but don't lose your shorts.
Welcome back to The Market Mosaic, where I gauge the stock market’s next move by looking at trends, market internals, and the mood of the crowd.
I’ll also highlight one or two trade ideas I’m tracking using this information.
And if you find this content helpful, hit that “like” button (you know, the one that looks like a heart). Because I heart you too…
Please share this post and become a subscriber to this always free newsletter if you haven’t already done so!
Now for this week’s issue…
I was out of town this weekend, so this week’s newsletter will be a bit shorter than usual!
In last week’s conclusion, I noted the absence of signs that a bear market rally could unfold. That was the case at the start of the week, and I did very well with a few of my short positions. That included Intrepid Potash (IPI) which I updated here:
I covered most of my position once IPI hit $45 as noted in my update. The other short position I listed in last week’s newsletter, Silvergate Capital (SI), started off in the right direction before reversing higher and triggering my stop for a small loss. Other notable breakdowns developed during the week, like with Deutsche Bank (DB) that I posted here.
But by the time Friday rolled around, the stock market was working on a major reversal pattern that I outlined with this tweet regarding S&P 500 Index futures, along with my expectation that a big portion of recent 11%+ decline could be retraced.
But can it keep going?
Bear Market Rally Underway…Maybe
Along with the pattern highlighted above, the complete failure of VIX to break above the 35 level again was another strong hint to be on rally watch. The next big level of interest will be the lower trendline which right now sits at about 25. This will be my most important chart to follow next week. If VIX can break below this pattern, that’s more fuel for the rally. I previously explained the stockmarket/VIX relationship here.
But last week’s gains still has not generated the classic breadth thrusts that accompany a bottom. I look at metrics like the ratio of NYSE advancing stocks compared to declining stocks. Or the volume in advancing stocks relative to declining stocks. Known as A/D ratios, the end objective is the same: spot a surge in these metrics around a bottom.
Surges indicate the arrival of institutional investors…those investors that control the big bucks. That’s the insider smart money, and gauges like A/D ratios will let you know when they’re serious about buying. I got excited because at one point on Friday, the volume A/D ratio was over 14. But at the close, it settled back to less than 5. So much for a breadth thrust.
I would still view any rally as a countertrend move within a larger degree downtrend. As mentioned last week, I still don’t have signs of capitulation to indicate selling exhaustion. The inability of VIX to jump over 35 as noted above tells you there isn’t much fear and panic just yet. And while that NYSE volume ratio above is impressive, it was nearly double that figure at the true bottom in 2018 and 2009
Nonetheless, I intend to practice what I preach by staying objective and tactical. And with the late week price strength, more long ideas are finally showing up in my screens. I’m still holding short/put positions in DB and NUE (noted here), but here’s a few long ideas I’m tracking as well.
One of my favorite long setups is with Resources Connection (RGP). On Friday, the stock broke out over the $20 resistance level on a surge in volume. My first target in this name is $24.
I noted this one last week, and it remains on watch. The weekly chart below shows the stock starting to emerge from a consolidation. A more decisive move over the $30 level is my entry signal.
I’ve held a small position in FNKO since early May. I’m using the 50-day moving average as a stop loss, and the stock has been able to hold that level since I added my position…a great sign of relative strength. A broker upgrade drove FNKO higher last week, with a pending move out of this base that I highlighted here:
So there you have it. I’m still holding a few short setups that have broke down from bear flag patterns and haven’t triggered stop losses yet, while also following developments in tactical long ideas. That is just a reflection of my persistent message in this market, which is to be flexible and objective with adding new positions. Despite the new ideas, cash will remain my largest position until the stock market can prove it has bottomed via signs of panic and institutional buying.
That’s all for this week. I hope you’ve enjoyed this edition of The Market Mosaic, and please share this newsletter with anyone you feel could benefit from an objective look at the stock market.
Make sure you never miss an edition by subscribing here.
Thanks for reading The Market Mosaic! Subscribe for free and never miss an issue.
And 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 newsletter.