Buy THIS Set-up in ASX Stocks (But Avoid This) | Episode 58

By Jason McIntosh | Published 5 August 2022

Trade the Trend is a weekly video focusing on where the stock market is going. It’s for investors and traders looking for insights to the market’s next move. Jason uses technical analysis of stocks and trend following techniques to help you piece together the world’s biggest puzzle.

Where is the Stock Market Going?

00:00 Intro

00:34 A quiet week for the ASX 200 (what it means)

01:44 Zooming in on the latest price action

04:28 ASX Small Ordinaries outperforming (should you still buy)

06:58 Few people know about this indicator. Look what it says now.

09:15 This is the type of set-up I’m look for in ASX stocks

09:50 Buy be careful buying into this ASX stocks the look like this

Transcript (abridged)

Please note: Charts available from video

This video is going to focus on the ASX 200. I’m also going to tell you about an indicator that few people know about but has a history of picking key turning points in the market. So, make sure you stick around for that. I’m going to cover the S&P 500 in a separate video

We’ve got the ASX 200 on the screen. And this has really been constructive price action over the last week. So, there hasn’t been a great deal of movement over the last few days. But the fact that it’s holding onto these gains, so these gains we saw towards the tail end of last week, the fact that it’s been holding onto those gains and also holding above this resistance band, you can see this big resistance band between 6,900 and 6,800, broke through there and it’s been holding above there, I think that’s all quite positive.

This is actually very positive price action. The market had been struggling for a while to make any inroads into this resistance band. So, it’s good to see where…how it’s behaving now. We’ve also had several closes above the 100-day moving average. So, this blue line is a 100-day moving average, and then we have the 50-day moving average below it. So, we’ve got those closes above the 100-day moving average, which is another positive.

Now I’m going to jump over to the four-hourly chart to get a little bit more detail on the most recent price action. So, when we look at this, really, since the middle of June, we’ve started to see impulsive price action on the upside, and this period through here over the last few weeks. The upside price action has been what I’ve described as impulsive, and that’s where the up legs move with strength and the corrective periods tend to be sideways with shallow pullbacks.

And just looking at the price action through this period over the last week, it looks very much like that the dip is being bought, and it’s being well supported. And I think this is a market which is preparing to have another pop higher, probably towards 7,100 for starters. So, I think the price action is definitely constructive. If you’ve seen my video on the S&P 500, I’ve said that I think the strategy here is to give the momentum the benefit of the doubt.

I think that the paths of least resistance is in the direction of the current price movement which has been upwards over the last couple of weeks. But having said that, and if you’ve watched the S&P video, it is still very much a case of I think being cautious. It’s not about being too aggressive and charging back into this market because I think there is still risk there which could play out potentially over the next several months.

So make sure you look at that S&P 500 video so I can go through some of the scenarios. And there’s also some resistance we’ve got to be aware of in the ASX 200. I’d say the next resistance band is probably through around 4,000, around 7,200. Find some resistance coming in around there. Maybe let’s just draw that in. So, looks like we have a block of resistance around 7,300 and 7,200 thereabouts, which would be where…

I think the market is going to…we’ll find some difficulty in punching through that level at least in the near term. And then we’ve got this triple top resistance at the all-time high. So, I think there’s upside there, but I don’t think it’s blue sky upside potential by any stretch at this stage. And it’s also really interesting to keep an eye on these small ordinaries, which I’ve been covering over the last couple of weeks because it’s continuing to gather momentum.

And it’s now at its highest level over here in early June. And it’s been outperforming the ASX 200 quite comfortably, particularly over the last week where the ASX 200 has gone sideways, but we’re seeing the small ordinaries make new highs for the last few weeks. It, too, is approaching resistance area. So, if we have a look at this chart, just to identify some resistance, I’d say the resistance would come in around…yeah, we can probably draw some resistance in around here.

Probably call that our resistance band. So, we’re picking up some lows through here, a low here, picking up a high. So, let’s call that 3,020 to 3,080, which is just above where the small ordinaries is now. So, this would be a natural place to see the small Ords pause. And then we want to see what that pause looks like. Is it constructive? Does it just go sideways, pull back a bit and shop around?

And then that could provide a platform for…we saw a price action where it just chops sideways. Sets up potentially another punch higher. That would be positive price action. But we need to see that price action. And with that resistance point just here, yeah, now’s probably not the time to be getting too excited about adding extra exposure at this point.

I’ve been talking about incrementally adding exposure, but as I’m saying with the…so close to this resistance, I think it’s probably wait and see. Let’s see what consolidation we get and then we can reassess from there.

What I want to do now, I want to show you my proprietary indicator. And this is something I call the Motion 300, something I make available to members of my Motion Trader service. What it does, it measures the strength of the top 300 stocks. And it’s got quite a good track record of identifying key turning points. So, when the indicator is above 150 is where we start looking out for tops, when it’s below 50 is where start looking out for low points.

And just to show you how it works with the stock market… So, this…above here is a chart of the ASX 200, and here’s the indicator below. So, you can see as indicator bottoms and turns up it matches up with a low point in the market. The same occurred here and again happens here. Doesn’t work precision all the time. So, it’s given a signal here but the market still had a marginal new low before it rallied, and so on.

I’d describe it more as a barometer than a GPS guidance, but it can be very useful. And these shaded areas represent where the indicators peaked. And in these areas where it’s peaked or it’s come back down bottom again, you can see they’re generally periods of underperformance in the market where the market just struggled a bit. So, it’s a really interesting indicator. If you want to learn more, maybe just take a free trial to the website and you can read all about it.

But the point of showing you this now is that I’ve been following over the last few weeks closely because it’s been turning up after being in this oversold territory. It’s only been down this low a handful of times over the last 12 or so years. I’ve back-tested this back to the 1990s. So, it’s got a lot of data, and this is one of those turning points. So, it’s actually very interesting to look at it now.

And I’m also getting some interesting signals through my daily Motion Trader scans, which I do of the market. There’s some interesting opportunities which are starting to turn up. So, while I still think it’s time for caution, and it’s also interesting to see some of the opportunities. So, I want to show you some of the setups that I’m looking for. So, for instance, this is a stock which turned up in the daily signals a week or so ago. It’s a stock called TechnologyOne.

So, this is the type of setup I’m looking for. I’m looking for stocks where the moving averages have crossed, where the 50-day moving average is above the 100-day moving average. And I’m also looking for stocks which are making new 70-day highs, which this one did a week or two ago. And now we’re seeing follow-through strength. That’s a situation which I look for. I’m looking to buy into strength, not buying the weakness because this is where I think a lot of investors get things back to front.

And the stock I’d be avoiding now in this rebound…if this… We don’t know how this rebound in the market is going to play out. But if it turns out to be a bear market rally, I don’t want to be buying stocks like ARB Corporation. It was a great stock during the recovery from the COVID crash, but the moving averages are still trending lower and the stock is yet to get above its 100-day moving average. I don’t want to be punting that a stock like that is going to continue to turn.

That’s where the more… I think there’s a lot more risk in this stock than a stock like TechnologyOne where you see those moving averages crossing. I think this is still vulnerable. Some bad news from the company, this is stock which could quickly fall away. So, playing this recovery, I think it’s really a case of looking for the right setups. I think there’s some risky plays you can do at the moment and some big mistakes that you can make.

And if you’re interested in the signals for stocks like TechnologyOne, it could be a good time to come over and check out the Motion Trader service, take that free trial. I present you with the opportunities and calculate the exit levels and you simply decide which ones are right for you. So, it’s shaping up as a pretty interesting time in the market now with this potential turn going on and just working out how to position the portfolios.

So, I hope you found that helpful. Make sure you check out that video on the S&P 500 where I go through some of the possible scenarios for the market over the next few months. And look forward to coming back and talking to you next week.

Please see video for more details analysis and charts

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Meet Jason

I'm Jason McIntosh, the creator of Motion Trader. My career began in 1991 on the trading floor at Bankers Trust. Nowadays, I trade my own systems from home in Sydney. 
Motion Trader is for investors who value robust analysis, data driven entry and exit signals, commentary, and education. I use engineered algorithms to identify when to buy and sell ASX stocks. No biases or guesswork, just data driven signals.