Searching for strength as the S&P 500 pulls back.
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
Volatility is creeping back into the stock market following an extended period of calm. The combination of recent political developments heading into November’s elections along with the busiest two week stretch for corporate earnings is causing a stir. At the same time, expectations for a dovish shift in monetary policy will be tested later this week. Recent cooler inflation reports are sending Treasury yields lower while investors are betting that interest rate cuts will happen as soon as the Fed’s September meeting. This Friday will see the most recent PCE inflation report, which is the Fed’s preferred gauge, for the month of June. The chart below shows the year-over-year change in core PCE that strips out food and energy prices (blue line). Based on an inflation tracker from Goldman Sachs (red line), core PCE inflation is anticipated to keep moving toward the Fed’s 2% inflation target.
While falling yields are recently driving a surge in stock market breadth, the major indexes are feeling the weight of mega-cap technology companies. After peaking in mid-July, the S&P 500 is about 3% off the high while the Nasdaq has declined by 6%. While it’s easy to attribute the pullback to political catalysts and earnings reactions, indexes like the S&P 500 were becoming extremely overbought following a rally over the past three months. The S&P is also progressing through a weak seasonal stretch as you can see in the chart below. While July is historically a strong month for returns, the gains tend to occur in the first half.
Although the S&P 500 and tech-heavy Nasdaq are pulling back, the average stock has been moving higher. Since the Nasdaq peaked on July 10, the Russell 2000 Index of small-caps has jumped 9% while new 52-week highs across the major stock exchanges hit the highest level in three years. That type of relative strength is exactly what you prefer to see when the major indexes weaken. I’m seeking stocks that are showing relative strength and setting up in consolidation patterns like the ones reviewed in the charts below. Once the major indexes stop pulling back, stocks that are among the first to new highs are often the leaders on the next rally leg. For this week, I’m removing CLBT as the stock holds onto its breakout. I’m also taking ELF off watch as price action weakens over the past week while better setups are developing.
Keep reading below for all the updates…
Long Trade Setups
LNW
Good basing action after the stock peaked just under $110 in March. Price is recently retesting that level and pulling back. Watching for a smaller pullback that resets the MACD at the zero line. That sets up a move to new highs over $110.
RKT
After hitting the $15 level in December, the stock has come back to test that resistance area four times this year. Seeing smaller pullbacks on most retests. Watching for a breakout over $15.
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.
DDOG
A recent rally brought price back to around the $135 resistance level that goes back to February. The MACD was extended to the upside and is now resetting. Watching for a smaller pullback that 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 relative strength (RS) line.
COIN
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 so far not receiving confirmation by the RS line.
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.
