Mosaic Chart Alerts
S&P 500: A growth scare ushers in poor seasonality.
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 series of reports on the health of the labor market and manufacturing sector are delivering a growth scare for investors this week. First up was the ISM report on manufacturing sector activity. The series is constructed so that a reading above 50 indicates expansion while below 50 points to contraction. The August update came in at 47.2, which is the fifth consecutive month of contracting manufacturing activity. The new orders component that is a leading indicator of activity fell to 44.6 from 47.4 in July.
Then came the JOLTS report that’s widely followed by economists as an ancillary indicator of the labor market. According to the report, available positions declined by 237,000 to 7.67 million in July. That’s the lowest level of job openings in over three years. In response to the weaker economic data, market-implied odds for a larger half-point rate cut at the Federal Reserve’s September meeting are jumping higher. Odds for a 0.50% rate cut now stand at 45% as you can see in the chart below.
Regardless of incoming economic data, stocks were set to encounter seasonal headwinds. The month of September is the worst on average historically for both the S&P 500 and Nasdaq 100 Index. Along those same lines, volatility in daily returns also ramps up over the next couple of months as you can see in the chart below. Throw the presidential election in November on top of weak seasonal trends, and you have all the ingredients for a bumpy ride over the next couple of months.
However broader market trends play out over the next couple months, I’m keeping an eye on price trends in stock market sectors and other segments of the capital markets sensitive to the economic outlook. If tough times are ahead for the economy that could also jeopardize the corporate earnings outlook, then I would expect an early warning from market segments like housing, industrials, and high yield bonds. Despite the shaky start to September, broader uptrends in the aforementioned sectors remain intact. For this week, I’m not making any changes to the watchlist but have updated charts along with key levels.
Keep reading below for all the updates…
Long Trade Setups
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 relative strength (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.
GE
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. Watching for a breakout with the RS line at new highs.
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.
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.
FG
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.