Can slowing inflation boost stocks?

May 10, 2023

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

In today’s most recent Consumer Price Index (CPI), consumer inflation increased by 4.9% in April compared to last year. While that’s well above the Federal Reserve’s 2% target, it continues a trend of moderating increases and is the smallest gain in nearly two years (CPI chart below).

The guts of the report were also encouraging, with shelter prices (that make up around a third of the CPI’s calculation) decelerating for the first time in about two years. Slowing inflation reinforces the expectation the Fed will finally pause its hiking campaign, which has been the fastest in history. Market implied probabilities currently point to a 97% chance of no hike at the next meeting.

And while that might seem like another welcome data point for the stock market, the S&P 500 is finding it difficult to generate traction. The 4200 resistance level remains in place as you can see in the S&P futures four-hour chart below, where I’m tracking a new ascending triangle pattern. Even if the index can attempt a breakout, market internals remain in a state of uncertainty. I wrote in last week’s Market Mosaic how breadth metrics are failing to improve and measures of investor sentiment are mixed. At the same time, key cyclical sectors continue trading near support levels that would send a negative signal if breached.

As a result, I continue to position size more conservatively when breakouts are happening while also being quicker to take gains. I can’t wait for the day when I can become more aggressive, but for now I’m reacting to prevailing conditions. This week, I’m taking SOVO and HIMS off the long watchlist. While SOVO is holding the breakout from its pattern, HIMS pulled back under key moving averages following earnings. I also noted last week that I didn’t like the MACD position as the stock tried to breakout while the RS line didn’t confirm. I’m removing AFRM from the short watchlist as recent price strength invalidates the pattern. That means there are several additions to the lists this week.

Keep reading below for all the updates…

Long Trade Setups

INSP

Consolidation extending back to late 2021 created a resistance level around the $285 area. Price trying to break above that level on a small MACD reset while the relative strength (RS) line is making new highs.

SPSC

This stock had recently come off the watchlist, but today’s price action driving a breakout. Closing above resistance around the $155 level today, with the RS line making a new high. Watching for a return to the prior high at $174.

FNV

Gold mining royalty stock testing resistance just below the $160 level. Follows a MACD reset at the zero line and RS line near 52-week highs. Pattern since mid-April similar to a bull flag that’s breaking out.

NVGS

Trading in a consolidation pattern since last June, creating an ascending triangle. Don’t like the recent move below key moving averages, but will keep on watch for a breakout over the $15 level since it’s still within the pattern.

PODD

On the verge of taking out resistance going back to the 2021 peak around the $325 level. Need to see an increase in volume and RS line to new highs on a breakout.

SKY

Recently failed on a breakout attempt over $73. A jump in volume along with RS at new highs were positive signs, but price fell back into the pattern. Keeping on watch, with $75 now being the breakout level.

Short Trade Setups

SLG

Starting to test the $20 support level. Bounced off this area in March, but a longer-term chart shows the importance of this area going back to 2020. MACD reset under the zero line with RS hovering near the lows.

JWN

Created a support level around the $15 level since the start of the year. Took out that level following a MACD reset under zero, and now backtesting the breakdown.

CHPT

Testing support just above the $8 level while the RS line remains near all time lows. Looking for a downside continuation move with a break of support.

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 Twitter: @mosaicassetco

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