Mosaic Chart Alerts
S&P 500: The Fed's no news is good news for stocks.
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
Despite a strong labor market and recent higher than expected inflation reports, the Federal Reserve is holding firm in one key forecast. While the Fed kept the short-term fed funds rate unchanged as widely expected, the summary of economic projections (SEP) also stayed the same in one important aspect. The SEP outlines Fed member forecasts for things like economic growth and inflation. It also shows where Fed officials see the short-term fed funds rate in the future, which continues to show three rate cuts in 2024 (the same as the last SEP in December). The chart below compares the Fed’s median SEP forecasts to market-based projections, which are around the same levels through the end of 2024. So despite hotter consumer and producer price inflation data last week, the Fed is staying in its data dependent “wait and see” mode before modifying their outlook.
Regardless of the market reaction to the Fed and updated SEP, I’m tracking a short-term bullish setup on the S&P 500 with an upside continuation pattern. Since the first week of March, the S&P has tested resistance several times just above the 5180 level. A series of higher lows is taking place since then as well, creating a bullish ascending triangle pattern that you can see with the dashed trend lines. In the aftermath of today’s Fed meeting, price is now breaking out of that pattern to the upside as you can see in the chart below.
As that pattern has developed, there’s been a growing negative breadth divergence across the stock market. Despite the S&P holding up near the highs, fewer than 60% of stocks across the major exchanges are trading above their 50-day moving average for the past two months (circled area in the chart below). That’s a good measure of how many stocks are in intermediate-term uptrends, and shows falling participation in the uptrend since the start of the year.
While the high level of short-term rates (relative to inflation) and inverted yield curve remain a challenge, other metrics are positive for the economic outlook. I wrote in my weekend report about the positive message coming from high yield bonds, while forward earnings estimates are supporting the move to new highs in the S&P 500. Also, the growing negative breadth divergence noted above is happening as recent breakouts in the small-cap sector are pulling back to test support. Small-caps were a leader in the post-Fed rally, and are moving higher off support levels which could help the breadth picture improve. For our watchlist this week, I have one new addition and updates to our existing setups.
Keep reading below for all the updates…
Long Trade Setups
DKNG
Consolidating since mid-February with resistance at $45. That trading range allowed the MACD to reset at the zero line, while the relative strength (RS) line has stayed near the high. The stock is breaking out over $45 today on a jump in volume.
LI
This setup needs more time to base, but wanted to get on the watchlist. The stock made a quick move to test resistance at $45 which is the post IPO highs. Pulling back which is allowing the MACD to reset. Would also like to see the RS line improve before trying to breakout.
MPTI
Testing resistance around the $44 level since the start of January, while making an ascending triangle pattern. Recent MACD reset on the most recent test, while the RS line is holding near the highs. Watching for a breakout over $44.
NXT
After the gap higher through the $50 level, the stock has been trading sideways which is allowing the MACD to reset at the zero line. While the RS line is holding up near the highs, I would prefer to see more time basing before breaking over the $60 level to new highs.
CUBI
Consolidating the gains after hitting $60 in late December. Would prefer to see the RS line take out the December peak on any breakout attempt. A move over $60 could target the prior high from the start of 2022.
PATH
Attempting to emerge from a bottoming base going back nearly two years. Stock basing since December after breaking out over the $20 level. Don’t want to see support at $21 give way, which would invalidate the pattern. Watching for a move over $27.
STNE
Starting to emerge from a bottoming base going back two years. Took out resistance at $15 and now consolidating the gains. Trading sideways since late December, with a new resistance level near the $19 level. Want to see support at $16 hold in the pattern.
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.