Right now, investors are forced to choose a side. Should they ride the rally that started in July, which was the best month for stocks in nearly two years, or should they hold back and brace for the impact of another rate hike from the Fed?
Friday's stunning jobs report saw 528,000 new jobs created in July versus expectations of 250,000. This surge means the Federal Open Market Committee (FOMC) is likely to raise the fed funds rate by another 75 basis points at its next meeting, scheduled for Sept. 20-21.
Buying now means fighting against the central bank, which already has raised its key rate by 150 basis points since mid-June. Rate hikes tend to have a negative effect on stock prices as higher rates make bonds more attractive to investors.
Failing to participate in the rally has its own consequences. What can the charts tell us?
The key to this rally is the S&P 500 daily chart. The highest close for the large-cap index in the past three months was 4,176 (dotted line), set on June 2 (arrow).
On Monday, the index moved above that level for the first time in three months and was immediately slapped down. Over the past three sessions the S&P 500 has made no progress, but is holding steady just below resistance.
Maybe that's a coincidence, but if so, this rally picked an interesting place to lose momentum.
Source of charts: TradeStation
I'm going to use that level as a fulcrum. A break and close above 4,176 will be interpreted as a buy signal.
Which stock will I buy if that breakout occurs? I've got my eye on U.S. Steel (X) .
Over the past two months, U.S. Steel has formed a cup-and-handle pattern (curved lines). Volume on the handle is well below average (shaded yellow), which is normal for this type of consolidation. Think of it as the calm before the storm.
I'd like to see this stock break out from the handle on high volume, which would indicate the presence of institutional investors. Ideally, I'd like to see the S&P 500 break out at the same time.
While this pattern projects U.S. Steel to the $30 area, there is resistance ahead in the form of the stock's 200-day moving average (red), currently at $25.49. U.S. Steel has already climbed above its 50-day moving average (blue).
One caveat: In order to enter this trade, both U.S. Steel and the S&P 500 need to break out. That type of confirmation would send a powerful signal that both the stock and the market are headed higher.
