Bitcoin is close to a breakout…and what it means for stocks.

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.

Stock Market Update

Following a 7% rally over the past month that took the S&P 500 to new all-time highs, cracks in the foundation are starting to show. While the S&P 500 is hovering near its high, the average stock is starting to pull back. You can see that in the chart below with the percent of stocks across the stock market trading above their 20-day moving average. After peaking at 72% a week ago, the number of stocks trading in short-term uptrends has dropped to 58%. Another concern is with companies in the economically-sensitive transportation sector. The IYT exchange-traded fund that tracks stocks in the transport sector is testing the 200-day moving average after falling 8% since the high back in March. At the same time, there’s been a sharp rebound in bullish investor sentiment. At the start of the month, fear was the prevailing mood according to CNN’s Fear & Greed Index. That gauge is now firmly into “greed” territory.

Daily momentum indicators like the S&P 500’s MACD and RSI are extended, indicating the potential for mean reversion lower. While I would not be surprised to see a partial retracement of the recent gains in the stock market, I expect any downside is just a pause in the bull market. As I covered in this week’s Market Mosaic and video update, loose financial conditions remain supportive of asset prices overall. Risky asset classes are particularly sensitive to easing conditions, which is why I’m closely following the action in Bitcoin and crypto mining stocks for additional confirmation that the bull market is intact. After briefly taking out the high from late 2021, Bitcoin has spent the past two months consolidating gains off last October’s low (shaded area in the chart below). Price is moving up the right side of the base over the past month and could be setting up a move to new highs. A breakout would provide further evidence that investor appetite for speculative assets remains strong.

There’s been an expansion in breakouts across the market as the S&P 500 went out to new highs. Several of those breakouts from the watchlist are pulling back recently to test support levels, especially in the commodity sector. It’s common to see price come back to test the breakout level, which now serves as support rather that resistance. But in my studies (and experiences) of past successful trade setups, price should not trade back below the breakout candlestick, which is where I target my initial stop loss. That might not seem like much wiggle-room for a new trade, but keeping losses small is key to skewing risk and return in your favor. For this week, I’m removing EGO, TTD, ALKT, and URA from the watchlist as prices breakout to complete their chart setup. I’m also removing GCT as recent price weakness invalidates the pattern. That means there are several new additions to the watchlist this week.

Keep reading below for all the updates…

Long Trade Setups

IBIT

Adding a spot Bitcoin ETF to the watchlist. Tracking the consolidation in Bitcoin mentioned above. For IBIT, I would prefer to see one more pullback off the $41 resistance level that resets the MACD at the zero line. Watching for a move over $41.

COIN

If Bitcoin starts moving, then I’m watching COIN’s pullback since late March. Watching for price to return to resistance around $275 then want to see another small pullback that resets the MACD at zero. A move over $275 could target 2021’s high near $350.

NU

An IPO from 2021 that’s testing the post-IPO high. Basing since late March with resistance at $12.50. Recently making a smaller retracement in the pattern while the relative strength (RS) line holds near the high. Watching for a move over $12.50.

SHAK

Trading in a tight range since gapping over resistance at the $80 level. Pricing holding support at the top of the gap, with a new resistance level at $110. A move over $110 could target the prior all-time high near the $130 level.

OII

Basing pattern since peaking last September near $27. Making a series of higher lows over the past six months, with price action tightening recently in a bull pennant. Watching for a mover $26.

ONON

Price recently gapping through the $36 level which held as resistance going back to last July. Want to now see price back test that level as support and reset the MACD at the zero line. So far creating a new resistance level at $39.

TRMD

Broke out over a prior resistance level at $32 and now back testing that level as support. Trying to move above the next resistance level near $37, but the MACD is extended and needs to reset before breaking out.

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, you can visit me here: www.mosaicassetco.com

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.