Bullish rotation and breadth thrusts.
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
Last week’s Consumer Price Index (CPI) set off a massive rotation in the stock market, and the aftershocks continue to be felt. A combination of cooling inflation and a softening labor market is repricing the outlook for interest rates and monetary policy. Odds for a rate cut at the Federal Reserve’s September meeting now stand near 100%, while a total of three 0.25% rate cuts are now projected through the end of the year. But the capital markets don’t expect it to end there. The 2-year Treasury yield tends to lead changes in the short-term fed funds rate. As you can see in the chart below, the 2-year yield continues falling after breaking the dashed support trendline back in May. I’ve highlighted the 2-year yield in the past as a leading indicator for monetary policy, and it’s worth noting that the 2-year crossed below the level of fed funds in early 2023 and hasn’t moved back above since.
Longer-dated yields are on the decline as well, with the 10-year Treasury down to 4.16% after being as high as 4.70% just a few months ago. The shifting rate outlook is igniting the average stock, with the Russell 2000 Index of small-cap stocks gaining over 11% in just five days. The five day relative outperformance of the Russell versus the S&P 500 is also the largest in history. At the same time, new breadth thrusts are being triggered. The table below shows forward returns for the S&P 500 when a Whaley Breadth Thrust is triggered. This occurs when five-day advancing stocks across the market outnumbers declining stocks by 3 to 1. In past instances, the S&P 500 is higher every time over the next year with a median return of 24%. This metric also triggered late last year alongside other gauges of breadth thrusts.
Along with various metrics highlighting strong participation, stocks in the right sectors are moving out to new highs. Housing stocks are making new highs as indicated by the XHB homebuilders exchange-traded fund, and bank stocks are rallying as well. And after diverging negatively since March, transportation stocks are back near their prior highs. The rally in cyclical stocks that are sensitive to the economic outlook is providing an important signal about the earnings picture and health of the bull market. For this week’s watchlist update, I’m removing APPF, CIFR, and SKWD as those stocks rally out of their chart patterns. That makes room for a few new additions this week.
Keep reading below for all the updates…
Long Trade Setups
CLBT
Peaked near the prior highs around $12.50 back in March, then entered a consolidation pattern. Tighter price action since June, with a recent MACD reset at the zero line. Breaking out today on higher volume.
FG
Broke out of a base back in November and rallied to the $48 area. Consolidating gains since the start of the year and recently rallying back toward $48. Want to see price make one more smaller pullback that resets the MACD before trying to breakout.
MELI
Basing just below the $1,800 level since January. Making a series of smaller pullbacks since then on each retest of $1,800. Want to see one more smaller decline that resets the MACD before breaking out.
ELF
Pulled back after hitting the $220 level back in March. Price recently testing that level again and pulling more than ideal. The MACD is dropping below the zero line, but will keep on watch if support at $160 is holding. Still watching for a move over $220.
DDOG
A recent rally brought price back to around the $135 resistance level that goes back to February. MACD is extended to the upside and needs to reset. Watching for a smaller pullback to reset the MACD which sets up a breakout over $135.
MNDY
Took out resistance around the $235 level in May then pulled back. Not the tightest base considering the price action going back to March, but the right side of the base is forming better as the MACD resets. Watching for a move over $245.
PDD
Trading in a consolidation pattern going back to December and recently working up the right side of the base. That move left the MACD extended, with price recently pulling back. Need to see the MACD move back above zero, then a move over $160 with confirmation by the RS line.
COIN
Keeping COIN on the watchlist for now. Still watching for price to return to resistance around $275 then want to see another small pullback that resets the MACD above the zero line. A move over $275 could target 2021’s high near $350.
TRMD
Broke out over a prior resistance level at $32 and back tested that level as support. Trying to move above the next resistance level near $38, but would like to see one more smaller pullback before trying to break out.
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.
