Is the S&P 500 out of the woods yet?

Aug 15, 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

Further evidence of disinflation is sealing expectations for the first cut to the fed funds rate since 2020. Federal Reserve officials, including Chair Jerome Powell, have frequently reiterated the need for more evidence that inflation is progressing toward the central bank’s target before rate cuts get underway. This week’s reports on both producer and consumer inflation should provide more confidence for central bank officials.

The Producer Price Index (PPI) came first, which rose 2.2% in July compared to last year. That came in below expectations, and was a sharp drop from June’s 2.7% pace. The more closely watched Consumer Price Index (CPI) increased by 2.9% compared to last year, which matched economist estimates for July’s figure. While the core CPI figure that strips out food and energy rose by 3.2%, it’s the smallest increase since May 2021 and continues a trend of disinflation in the core CPI. The chart below shows the annualized pace of core CPI across 12, six-, and three-month timeframes.

As the start of a rate cutting cycle comes into view, volatility across the capital markets is quickly subsiding. After spiking to the third highest level in history last Monday, the CBOE Volatility Index (VIX) is trading back to levels seen just before the spike (and are below VIX’s long-term average around 20). As I discussed in last week’s Market Mosaic, I believe the move higher in volatility was more structural and positioning unwinds versus signaling a pending economic crisis. You also had all the ingredients to see a rally unfold over the near-term. That includes oversold breadth metrics, a jump in bearish sentiment among investors, and signs of capitulation from volatility markets like the inverted term structure of the VIX futures curve that I described here.

Looking ahead, there are a few key levels to monitor for the S&P 500 in the chart below. You can see that the S&P rebounded off price support at the 5200 level. The MACD and RSI in the middle and bottom panel showed momentum was stretched to the downside as well. There are now important resistance levels to watch. That includes a test of the 50-day moving average (MA - black line) at the arrow from below, while the S&P also filled gaps from the turn lower that started on August 2. For now, the MACD is making a bearish reset below the zero line while the RSI is also in a weak position. The key test over the near-term is for the S&P 500 to clear the 50-day MA along with the MACD crossing back above the zero line and the RSI increasing over 60 to signal improving price momentum.

While the S&P 500 is bouncing off support levels, it remains below the peak made in mid-July. That makes locating relative strength in this market environment a bit easier - simply look for stocks breaking out of basing patterns and moving to new 52-week highs. Stocks with strong growth fundamentals that are bucking the recent trend of weakness are candidates to lead the next rally phase. At the same time, watchlist ideas that are breaking down below price support and are no longer showing smaller pullbacks in their basing patterns should be set aside. For this week, I’m removing SKWD as price weakness invalidates the chart setup. I’m also removing IAG and PLTR as each stock is breaking out to new 52-week highs. That makes room for several new additions to the watchlist.

Keep reading below for all the updates…

Long Trade Setups

ONON

After breaking out over a larger basing pattern, price is now forming a “base on base”. Following a move over $35 in May, the stock peaked at $44 and is now back testing $35 as support. Would like to see one more smaller pullback before trying to move over $44.

RACE

Peaked near $440 back in March and consolidating gains in a new basing structure. Recently making a smaller pullback that reset the MACD at the zero line. Breaking above $440 today on higher volume.

NOW

Trading in a basing pattern since hitting around the $810 level back in February. Recently making a series of smaller pullbacks with resistance now at $830. Watching for a breakout with the relative strength (RS) line at new highs.

BIRK

After gapping over the $50 level, price action is creating a base on base pattern with new resistance at $60. Recent MACD reset at zero while the RS line holds near the high. Watching for a move over $60.

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. Need to see the MACD turn up and not dip too far below zero.

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 hold support at the $35 area.

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 pulling back. Need to see the MACD move back above zero, then a move over $160 with 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.