Can cooling inflation drive the S&P 500 higher?

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.

Stock Market Update

Investors greeted a weaker than expected inflation report by pushing the S&P 500 to its 28th record close of the year. The headline Consumer Price Index (CPI) came in at 3.3% in May compared to last year, while the core figure was reported at 3.4%. Both figures were slightly less than economist estimates. And although the headline CPI’s year-over-year gain is grinding sideways since last June, the core measure is moving lower and posted its smallest annual gain in over three years.

While falling core inflation is a welcome sign, progress has been slow as reflected in projections by the Federal Reserve during today’s rate-setting meeting. Fed Chair Powell commented that more “good data” is needed to bolster confidence that inflation is returning to the Fed’s 2% target. Fed officials also walked back the number of rate cuts expected this year in their updated summary of economic projections (SEP), which now reflects just one 0.25% rate cut this year compared to three in March. That’s in line with recent market implied odds and should hardly come as a surprise. But compared to the last SEP, the Fed now expects four rate cuts in 2025 compared to three in the last meeting. The chart below shows the headline (red line) and core (blue line) CPI along with the current level of the fed funds rate (black line).

The shifting narrative around inflation and the outlook for interest rates sparked a big rally especially in growth stocks, and comes just as stock market breadth was reaching oversold levels. I noted in this weekend’s Market Mosaic that while there’s been sharp breadth deterioration against the S&P 500’s recent string of new highs, there were emerging signs that breadth was oversold on a near-term basis.

For evidence that the risk-on move can stay intact, I’m still tracking the setups in Bitcoin and small-cap stocks that I highlighted in last week’s chart report. The share price of both are still trading below key resistance levels that I outlined even with today’s rally. But there’s another chart that has my interest following today’s inflation data and Fed meeting, and that’s with the U.S. Dollar Index. The dollar is trading near a convergence of key levels including trendline support along with the 50- and 200-day moving average (black and green line respectively). At the same time, the MACD is resetting just below the zero line. If there’s a sustained move below these levels along with losing price support at 104, that could serve as another risk-on signal and boost commodity sectors in particular.

The recent action in the average stock means the past couple weeks have been relatively quiet for trading breakouts. The transition to a regime of net new 52-week lows across the stock market is reflective as well. But there are a number of constructive setups developing, where I’m targeting stocks showing relative strength inside sound basing structures. My screening criteria also focuses on growth fundamentals, with strong year-over-year increases in sales and earnings growth along with positive analyst revisions. For this week, I’m removing PINS as the stock breaks out to complete its pattern. I also have a couple new additions to the list this week.

Keep reading below for all the updates…

Long Trade Setups

PLTR

Trading in a new basing pattern since February following a big gap higher. Recently turning back higher toward resistance around the $25 level. Would like to now see the MACD reset at zero on a small pullback in price. Watching for a move over $25.

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 recently pulling back to reset the MACD at zero. Watching for a move over $160 with confirmation by the relative strength (RS) line.

ARM

Consolidating gains since February following a big jump on earnings. Resistance near the $150 level has held since then, with price turning higher toward that level again. Would like to see one more smaller pullback to reset the MACD at zero before attempting to breakout, but starting to move above $150 this week.

SKWD

An IPO from last year that’s creating a resistance level around $38 to monitor. The MACD is making a series of higher lows since February, but a recent attempt at a breakout failed. Want to see pattern support at $33.50 hold, and still watching for a close over $38.

RDDT

After going public back in March, price is basing near the post-IPO highs while the MACD is making the “hook” pattern that I’ve described in recent videos. Now watching for a new high over $70 with the RS line at a new high.

IBIT

Adding a spot Bitcoin ETF to the watchlist to track the consolidation in Bitcoin. For IBIT, recently seeing one more pullback off the $41 resistance level that is resetting the MACD at the zero line. Watching for a move over $41.

COIN

If Bitcoin starts moving, then I’m watching COIN’s pullback since late March. Watching for price to return to resistance around $275 then want to see another small pullback that resets the MACD at zero. A move over $275 could target 2021’s high near $350.

NU

An IPO from 2021 that’s testing the post-IPO high. Basing since late March with resistance at $12.50. Recently making a smaller retracement in the pattern while the RS line holds near the high. Watching for a move over $12.50.

TRMD

Broke out over a prior resistance level at $32 and now back testing that level as support. Trying to move above the next resistance level near $38, but the MACD is extended and needs to reset before breaking out.

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, you can visit me here: www.mosaicassetco.com

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.

Can cooling inflation drive the S&P 500 higher? was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.