Mosaic Chart Alerts
S&P 500: Dead cat bounce or is the bull back?
Welcome back to Mosaic Chart Alerts!
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.
These ideas are the end result of my process to identify stocks offering the right combination of fundamentals along with a proper chart setup.
Here are my notes from a focus list of setups I’m monitoring.
Stock Market Update
Following a 5% pullback in the S&P 500 that led to oversold breadth conditions and bearish sentiment across several metrics, stocks are staging a recovery. With the S&P 500 tacking on 2% over the past three trading sessions, broader participation is an encouraging sign. In last week’s Market Mosaic, I highlighted early signs of positive breath divergences in the percent of stocks trading above their 20-day moving average. The NYSE McClellan Oscillator, which tracks advancing stocks versus decliners over a trailing period, has staged a sharp recovery back above zero as you can see below (blue line in the bottom panel). That follows the most oversold level since the banking crisis last March.
But several of the major indexes are coming up to key levels that will reveal if this rally over the past couple trading sessions is just a dead cat bounce from oversold levels or a resumption of the bull run. In the S&P 500 chart below, note that the recent rally followed the gap fill from February 22 and happened as the relative strength index (RSI) in the bottom panel hit the most oversold level since late October. There are several price and momentum resistance levels to watch now. The 50-day moving average (MA - black line) is just overhead, while the MACD indicator in the middle panel is coming up to the zero line from below. If price struggles at the 50-day MA, the MACD stalls at zero, and the RSI struggles to get back above 50, then that points to a dead cat bounce. If those levels can be cleared to the upside, then that’s a good sign that the bull market is getting back on track.
Regardless of the outcome, my process for adding new position trades remains the same. I use pullbacks to my advantage by looking for stocks trading inside basing patterns that are showing relative strength. This is where the relative strength (RS) line in my charts becomes extremely useful, as it provides a visual tool to see which stocks are bucking the trend of weakness in the S&P 500. Some stocks on the watchlist like ITRI are even seeing their RS line hit new 52-week highs even before breaking out of their pattern. That’s a great sign of momentum quietly building, with the RS line tipping the new leaders if the uptrend resumes. As noted last week, I’m removing NET from watch as ongoing weakness is invalidating the chart setup. I have several updates to our watchlist plus a new addition.
Keep reading below for all the updates…
Long Trade Setups
LFMD
After breaking out from a larger base over the $9 level back in March, the stock is back testing that level and consolidating for another run. The RS line is already near a new 52-week high while the MACD resets at the zero line. Watching for a move over $12.
DDOG
Maintaining a series of higher lows since last April, and now trading sideways for the past three months. The RS line is holding near 52-week highs, while the MACD recently crossed back above the zero line. Watching for a move over $137.
CRC
Oil and gas stock that’s consolidating since last September. Created a resistance level at $58, which was recently tested again. Would prefer to see the RS line strengthen further on any breakout attempt over $58.
ITRI
Gapped over $80 from a basing pattern going back to July. Trading in a tight range that held support above the breakaway gap, with a new resistance level around $100. Looking for a move over $100 with the RS line at a new 52-week high.
URA
Putting uranium miners back on the watchlist. The ETF recently testing resistance again at the $32 level, which is a key level going back to 2021. Would now like to see a MACD reset at the zero line followed by a breakout.
TRMD
Broke out over a prior resistance level at $32 and now back testing that level as support. The RS line is near the high while the MACD is trying to turn up from zero. Watching for a move over $37.
BX
Since peaking back in 2021, the chart has the appearance of a large saucer-type pattern. Price recently nearing the prior high at $140 and now pulling back. That’s resetting the MACD while price holds support at $115. Watching for a move to new highs over $140.
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, give me a follow on X: @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 post.
Regarding RSI, if conditions for MACD and a basing pattern are occurring, is price action likely to rise when RSI is rising and crosses the 50% line or when RSI is in an overbought position?