Mosaic Chart Alerts
Stocks get stoked by a dovish rate outlook.
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 refusing to take the prospect of more rate hikes off the table, the Federal Reserve also went ahead and penciled in three rate cuts into their projections for next year. The Fed left the fed funds rate unchanged at their last meeting of the year as widely expected, but caught investors off-guard in a bullish way with a dovish summary of economic projections (SEP). The SEP complies Fed officials forecasts for things like interest rates and inflation, and the median expectation shows the fed funds rate at 4.6% the end of 2024 (chart below). That implies 0.75% in rate cuts compared to current levels, and is a lower estimate than the last time the SEP was updated.
While ongoing strength in the labor market supports the “higher for longer” narrative, this week’s consumer and producer inflation reports for November are fueling speculation that the last rate hike was seen back in July. While the Consumer Price Index (CPI) came in as expected with a 3.1% increase in November compared to last year, the Producer Price Index (PPI) rose just 0.9% year-over-year. The PPI tends to lead changes in CPI, which is boosting views that consumer inflation will return to the Fed’s 2% target, which is already close when you annualize recent CPI readings as shown below (h/t Nick Timiraos).
Regardless of how the stock market ultimately reacts to inflation data and the outlook for monetary policy, there are some emerging reasons to become a bit more cautious in the near-term. I shared in this week’s Market Mosaic how investor sentiment is starting to enter bullish extremes, including retail and professional investors alike. I also stated that signals from sentiment shouldn’t be viewed in isolation, and that you should monitor breadth as well. This is where a couple warning signs are recently appearing, like with the percent of stocks trading above their 20-day moving average. You can see below that the average stock in a short-term uptrend is starting to lag the gains in the S&P 500. A couple more strong breadth days like today can help clear that up, but is still a trend worth monitoring.
Even if stocks do pullback, I expect the overall uptrend to remain intact with evidence that the rally can carry into next year. Along with the regime change to net new 52-week highs, key cyclical sectors like semiconductor stocks and homebuilders are performing well and stock market seasonality is mostly positive into next year. For this week, I’m removing URI from watch as the stock’s breakout pattern completes. I’m also removing LI and NVGS, which have not broken out while there are better setups to monitor for now.
Keep reading below for all the updates…
Long Trade Setups
Recently testing resistance at the prior high around $70. MACD extended on that test, now a small retracement of the rally since October. That's resetting the MACD back at the zero line. Now watching for a breakout over $70 with the relative strength (RS) line at new highs.
Progressing through a sideways trading range since July, creating a resistance level around $29. Looking for a breakout over that level, which could target the prior highs near $33.
Consolidating prior gains since August, forming a resistance level around $38. MACD recently turning up from the zero line and testing that level again. Expect a breakout to first target the prior highs at $40.
Trading in a basing pattern since mid-June, with a failed breakout attempt in September. Has traded in a similar range since then, with resistance around the $30 level. The MACD is resetting at the zero line, while the RS line stays near the high.
Consolidating after making a new all-time high back in July. Somewhat resembles a base-on-base pattern after testing the $150 breakout area. Price back near the highs, where I’m watching for a breakout over $195.
Big run over the past couple weeks to test resistance around $60. Need to see momentum reset for another move, so ideally the stock trades sideways for a period to reset the MACD at the zero line. If that happens, I would look to buy a breakout to new highs confirmed by rising volume and the RS line at new highs.
Made a quick move higher off support around $34. My ideal trade setup is price tests resistance around $45 then does a small retracement of the rally. Look for MACD to reset at zero in that scenario, followed by an attempt to breakout over $45.
Pulled back after reporting earnings. Will keep on the watchlist for now as long as support at $20 holds. Still watching resistance at $24, which is a level tested several times going back to 2021. Series of higher lows since last October’s bottom. A breakout could target the prior high near $29.
Trading in a bullish flag pattern following the rally from $27 in May. Looking for a move above trendline resistance around $47. The RS line is staying close to 52-week highs.
Uranium stocks could be basing for another move higher. The URNM uranium ETF is pulling back this week after testing resistance again at $50. May need to see another MACD reset before a breakout attempt.
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 Twitter: @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.