The S&P 500 is testing a critical level.

Sep 12, 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

A couple reports covering the Federal Reserve’s two mandates is pointing to a “Goldilocks” economy that’s neither too hot nor too cold. While the payrolls report for the month of August missed expectations, there were 142,000 jobs created in the month while the unemployment rate ticked down slightly. And now the Consumer Price Index (CPI) for the month of August showed headline consumer inflation increasing 2.5% compared to last year. That’s down from July’s figure of 2.9%. The core CPI that strips out food and energy rose by 3.2%, which was in line with expectations and the same as July’s figure.

So while there are ongoing signs of cooling in both the labor market and inflation readings, nothing is setting off alarm bells that recession is imminent. But relative to inflation, the fed funds short-term interest rate is still the most restrictive since before the 2008 financial crisis. The chart below shows the fed funds rate (blue line), year-over-year CPI (red line), and the 2-year Treasury yield (green line) that often leads changes in fed funds. And while there’s scope for rate cuts, market-implied odds are dialing back the chance of an outsized 0.50% cut at the Fed’s upcoming September meeting.

Stocks were whipsawed following the CPI report. But a look at the chart of the S&P 500 shows a few developments worth monitoring. First, the S&P is crossing back above the 50-day moving average (MA - black line) from below at the arrow. That’s served as resistance over the past couple of trading sessions. On the downside, I would now watch minor price support at the 5400 level. If 5400 gives way, then I would not be surprised to see a quick retest of the August lows which I’ve maintained is a possibility after the historic volatility spike a month ago. We’re also coming up on the two worst weeks of the year for seasonality. But also note the MACD reset above the zero line, which is a bullish momentum signal as the S&P trades just below the prior highs.

Whether there’s a breakout or breakdown, look to breadth for bullish confirmation signals. If the S&P 500 does sell off and test the August lows, look for signs of positive breadth divergences on a retest. One example would be fewer net new 52-week lows relative to the level seen on the August 5 bottom. That would be a positive signal that markets could rally on a successful retest. If breadth worsens, that could be a sign of more weakness ahead of the elections in November. Whatever scenario plays out, my trading plan stays the same. That is to find stocks with strong growth fundamentals that are emerging from sound chart basing patterns. For this week, I have a couple new additions to the watchlist that are showing relative strength in recent trading.

Keep reading below for all the updates…

Long Trade Setups

CCS

After moving over the $90 level, the stock is consolidating gains and back testing that level as support while creating a bullish pennant pattern. The MACD is resetting at the zero line with the relative strength (RS) line holding near the high. I’m watching for a move over $107.

APP

Stock ran up to the $90 level in May and began consolidating. Recent smaller pullback off a test of resistance that reset the MACD at zero. Breaking out on volume today with the RS line at new 52-week highs.

META

Putting the stock back on the watchlist. Peaked around $530 in April and tried to breakout over that level in July. The move was not confirmed by the RS line and price fell back into the base. Smaller pullbacks with the MACD now resetting. Watching for a move over $545.

CYBR

Trading sideways since February while testing resistance at the $280 level on three occasions. Price is now back near the $280 level, where I would like to see one more smaller pullback that resents the MACD at the zero line before breaking out. The RS line is also holding near the high.

Trading in a tight sideways pattern since May while testing resistance near the $175 level several times. The RS line is holding near the highs as the MACD is resetting again at the zero line. Watching for a move over $175.

NOW

Trading in a basing pattern since topping near the $810 level back in February. Recently making a series of smaller pullbacks with resistance now at $850. Starting to breakout but the RS line is not at a new high.

TAYD

Peaked at the $60 level after moving out of a large base in January. Consolidating gains since April, with an initial resistance level to monitor at the $53 level. MACD recently crossing back above zero. Watching how the stock handles the prior high.

LNW

Good basing action after the stock peaked just under $110 in March. Price is recently retesting that level after 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 hold support at the $35 level on any pullback.

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.

The Market Mosaic

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