Mosaic Chart Alerts
Mosaic Chart Alerts
S&P 500: Will the Fed change risk sentiment?
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
While the Federal Reserve left the short-term fed funds rate unchanged at the highest level in over 20 years, the latest FOMC meeting featured something for bull and bears alike. During his press conference, Fed Chair Jerome Powell made it clear that more progress on lowering inflation is necessary before the central bank starts cutting interest rates. But even following higher than expected consumer inflation reports among the CPI and PCE series, Powell took the prospect of any further rate hikes off the table. In the aftermath of the meeting, odds continue favoring one rate cut this year (table below).
And while the expected path of interest rates for 2024 looks set to stay unchanged for now, the Fed did announce that the balance sheet runoff will start slowing. That’s where government bonds acquired as part of the Fed’s quantitative easing program matures, which has brought the Fed’s balance sheet assets down to $7.4 trillion from nearly $9 trillion at the peak in 2022. Reducing the pace of Treasury maturities to $25 billion from $60 billion starting in June could be interpreted as a dovish development in the aftermath of the Fed’s meeting. And despite the restrictive approach by the Fed with high interest rates, financial conditions overall are near the loosest level in two years as you can see below (below zero signals financial conditions are looser than average). Moderating the pace of balance sheet reduction could ease conditions further still.
Volatility in the capital markets was expected in the aftermath of the meeting, but the more speculative corners of the markets might already be hinting at the next move in the stock market. That’s due to the evolution of Bitcoin’s price trend, which has recently led changes in the S&P 500. Going back to last July, Bitcoin has tipped key turning points in the stock market. Like when Bitcoin peaked ahead of the S&P 500 last July, or when Bitcoin found a bottom last September ahead of the S&P’s bottom in late October. More recently, Bitcoin peaked in mid-March (circle) several weeks before the S&P. That makes yesterday's action concerning, with Bitcoin making another "lower low" (arrow) off the March peak as you can see below.
Even if the S&P 500’s downtrend continues with a break below the most recent April 19 low, now’s the time to look for positive divergences in things like the percent of stocks trading above their 20-day moving average or the McClellan Oscillator that I’ve previously highlighted. Those breadth indicators are a great way to track the performance of the average stock. And if the average stock can start holding up better than the broader indexes, that’s a key ingredient for the rally to resume. And stocks showing relative strength inside basing patterns are places to find the next round of breakout setups. For this week, I’m removing BX from the watchlist as recent price weakness is invalidating the chart setup. That clears the way for a new addition as well as updated charts for other stocks that remain on watch.
Keep reading below for all the updates…
Long Trade Setups
DUOL
Consolidating since initially taking out the post-IPO high around $200. Making a higher low in mid-April with price nearing resistance just under the $250 level while the MACD crosses above the zero line. Watching for a move over $250.
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 relative strength (RS) line is already near a new 52-week high while the MACD reset 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.
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.