S&P 500: The Fed's caution boosts stocks.

Aug 01, 2024

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 growth fundamentals along with a proper chart setup.

Here are my notes from a focus list of setups I’m monitoring.

Stock Market Update

In remarks following the Federal Reserve’s latest rate-setting meeting, Chair Jerome Powell stated that no decision has been made regarding a September rate cut. But other comments and key changes to the meeting statement would suggest otherwise. Notably, the Fed brought back language pointing to its “dual mandate” in the meeting statement, which includes full employment along with price stability. Powell also said that the “downside risks to the employment mandate are real now.” In other words, the Fed is becoming more attentive to economic risks by keeping interest rates elevated for too long. At one point following the meeting, the S&P 500 rose over 2% on the day. The index ultimately finished up 1.6%, having its best Fed day performance in two years (chart below).

While stocks are responding favorably across the board to the Fed’s latest meeting, there’s already evidence that a bottom was in place following the S&P 500’s 5% pullback off the mid-July peak. In my weekend report and video update, I laid out key levels to watch on the index along with positive signals coming from the volatility index (VIX) and high yield markets. I’m also still following the action in the U.S. Dollar Index (DXY) for the next risk-on signal. The chart below shows the dollar nearing the apex of a triangle consolidation pattern. DXY recently rejected off the 50-day moving average (MA - black line), while the MACD had a bearish reset below zero and the RSI is turning lower from the 50 level. A falling dollar is generally bullish for commodities and is an earnings tailwind for the S&P 500 since it can boost foreign sales and corporate profits.

While the S&P 500 is bouncing off support at its 50-day MA, it remains below the mid-July peak. But the action in the average has been much stronger recently, and the key now is finding stocks breaking out to new high ground ahead of the major indexes. That type of relative strength can hint at potential leaders during the next phase of the bull market trend, which I continue to believe remains intact. For this week, I’m removing RKT from watch as the stock breaks out from its chart pattern. I also have a couple new additions to the watchlist that are setting up.

Keep reading below for all the updates…

Long Trade Setups

IAG

Trading in a bullish pennant pattern after breaking out over the $3 level. Price action coiling while the relative strength (RS) line remains near the recent high and the MACD resets above the zero line. Watching for a move over $4.30.

PLTR

Creating a “base on base” pattern after breaking out over the $25 level. I would prefer to see one more test and smaller pullback off the $30 level, which is also resistance from 2021. A move above $30 can target the post-IPO high around $40.

LNW

Good basing action after the stock peaked just under $110 in March. Price is recently retesting that level and pulling back. Now getting one smaller pullback that reset the MACD at the zero line. That sets up a move to new highs over $110.

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. Want to see support at $110 hold. 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 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, 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.

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