Is weak breadth catching the S&P 500?

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

While the S&P 500 was trying to hold levels near the all-time highs, signs of bearish breadth keep stacking up. I discussed the S&P 500 equal weight exchange-traded fund (RSP) in this week’s video update, and how RSP is failing to confirm the recent highs made by the market cap weighted index. The equal weight version gapped below its 50-day moving average (MA) yesterday, while other signs point to the average stock pulling back further. That includes the percent of stocks across major exchanges trading above their 20-day MA that I updated here and now stands at just 32%. We also received a bearish crossover signal with the NYSE McClellan Summation Index, which is cumulative sum of the McClellan Oscillator values that tracks advancing versus declining stocks on the NYSE. The Summation Index crossed below its 10-day MA (green line) to generate a bearish reading as you can see below.

While many might cite the “sell in May and go away” mantra to explain the recent weakness, the seasonal picture is a bit more complicated than that. The expression refers to the historical pattern of a weak six month stretch for the S&P 500 from May through October, followed by strong returns from November through April. However, more recent decades have seen a deviation from that trend. The chart below shows the S&P’s average seasonal path for the past 20 years. Based on historical tendencies, May and June see volatile sideways trading before a summer rally commences. If the broader market does keep pulling back into the next month, that could setup an oversold condition ahead of July which tends to be a strong month.

Regardless of the reasons behind the pullback in the average stock, now’s the time to use the recent weakness in the average stock to your advantage. While 68% of stocks are trading below their 20-day MA, that means 32% are holding above and showing relative strength. Stocks showing relative strength along with strong growth fundamentals are great candidates for position trades. My research process has turned up a few additional names for the watchlist this week, with their chart setups discussed below. I’m also removing ONON as the stock is breaking out to complete its chart pattern.

Keep reading below for all the updates…

Long Trade Setups

SKWD

An IPO from last year that’s creating a resistance level around $38 to monitor. The MACD is making a series of higher lows since February, while price makes a smaller pullback since the start of May with a MACD reset at the zero line. Watching for a move over $38.

PINS

Price is recovering off a bottoming base, with a recent gap taking the stock over the $40 resistance level. Now want to see the stock keep trading sideways for a bit longer to reset the MACD at zero. Watching for a move over $43 next with confirmation by the relative strength (RS) line at a new 52-week high.

RDDT

After going public back in March, price is basing near the post-IPO highs while the MACD makes the “hook” pattern that I’ve described in recent videos. Now watching for a new high over $70 with the RS line at a new high.

IBIT

Adding a spot Bitcoin ETF to the watchlist to track the consolidation in Bitcoin. 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 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.

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 $38, but the MACD is extended and needs to reset before breaking 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.