ASX 200 Set to Rally (Buy THIS Instead) | Episode 55

By Jason McIntosh | Published 29 July 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

00:26 ASX 200 gains momentum and breaks resistance

01:20 The ASX 200 hasn’t done this since May

02:20 Don’t get excited about the current set-up

03:30 Why you should look beyond the big stocks

04:25 I’m most interested in this index (and why it could run)

07:59 This is my strategy for getting back into the market

09:03 Why you should be careful buying individual stocks

Transcript (abridged)

Please note: Charts available from video

We’re starting to see some momentum come into the ASX 200 after a long period really struggling below this big resistance band which we have between 6,700 and 6,900. So, what we can see just over the last couple of days, we’ve gone from the base of this resistance band up to the top. So, there’s some really positive developments there. And because the market really had struggled here, I think, look, you can see in the week prior it was really pinned by this resistance band. So, it has been positive to see that, potentially a break to the top side.

Also looking at those moving averages. So, I’ve got the 100-day moving average here and the 50-day moving average below it. And what we find now is that the market has closed above its 50-day moving average for the first time since back here in May. So, that’s a positive, and we’re now testing the 100-day moving average. So, for me, I like to see these moving averages cross. I like to see the 50-day move above the 100-day. There are the conditions I look for for a bullish trend. Very much like we saw down here when those moving average just crossed. That’s the key criteria for an upward trend.

We don’t have that yet, but potentially, these are the early signs of the market pushing higher and those moving averages starting to round upwards. So, I do think there is scope for the ASX 200 to push higher from current levels.

That said, though, I do find it hard to get excited about the local index at current levels because there’s still a lot of overhead resistance. So, for instance, if I just look across, I can see a cluster of highs and lows coming in at around…that’s around 7,100 to 7,200. You can see it picks up highs there, lows through here, some congestion through there, more work here. So even if the market does push high, it comes up to its next resistance level fairly soon. And then above there, we’ve got this triple top from around the all-time high of 7,600. So, there’s a lot of work for the local market to do to really start to push on.

The thing to be said, though, with the ASX 200 is heavily focused on the big caps. So, the main driver of this index is going to be BHP, Rio, CBA. Those big heavy cap stocks, they’re the dominant force within the ASX 200. So, I always find it interesting to look beyond the big names. A good way to do that is through the ASX Equal-Weighted Index. So, this is really interesting to do this because you get a completely different picture. It’s the ASX 200 but it’s not the capitalized version. It’s equally weighted and it looks completely different.

So, the ASX 200 was down something like 16% from high to low. Equal-Weighted was down 24%. So, there was a lot more damage done, particularly through this period from April to the June low. So, I think that means there’s also a lot more scope for recovery within the index and within some of those mid-tier names within the index.

Also, interesting to look at the ASX Small Ords, which actually looks more like this. So, let me just jump over to the Small Ordinaries. So, this is a chart we’ve been talking about. We were talking about this last week. And very interesting to look at because you can see these bearish flagging formations on the chart. So, this one went to textbook. We had a decline. We had the flagging formation, then it fell out at the bottom of that formation for another hard selloff. Then we had the makings of another flag, but rather than break down, this one has broken to the top side. And that’s often a sign that a market is reversing course. And that’s what we’ve seen continue over the last week.

So, last week, we did have…probably around here we were talking about, and since then, the market did have a brief pullback, and then it’s rallied again over the last couple of days. Moving averages are also interesting because you can see this 50-day moving average is showing signs of starting to round. Now that doesn’t mean that it’s going to go straight up. We just go back to this COVID period. This is your classic V-shape recovery. That’s not the typical way. It does happen sometimes, but it’s not the typical recovery. Markets typically grind along the bottom for a while. These processes can be drawn out then they start to turn higher.

I think the odds might be against that. You never know what the market’s going to do, though. And alternatively, it could chop around and then continue to round up, all sorts of scenarios on the table. But there are positive signs, at least for now, that some upside momentum is coming through, and that downside risk has really started to dissipate at least with the price action we have at the moment.

Now I was talking about the Russell 2000 in my S&P “Trade the Trend” video which I’ve recorded separately, and I’ve left a link for that below in the description section. And the ASX Small Ords, I think it’s quite a similar scenario to the U.S. small caps. As I was saying, maybe there’s more base building, but this is now really shaped up as a key low. I think the chances of this market turning on its head and crashing at least in the near term have really dropped away. I think the odds of that are quite low at the moment.

And what I’ve done through the week, I actually bought into an ETF, the iShares Small Ordinaries ETF. The ticker code is ISO. Because I think that this market, it’s like you just… Let’s just do some measurements from where we are here. So, I bought in yesterday. I got in around here. So, if the market were just to get back to where it was in April, back to these highs, that’s a 17.5% rally. And as I was saying, I think that downside is relatively contained at the moment. So, whether this is the start of a new bull market, nobody knows, but even if it’s just a bear market rally, bear market rallies can be quite significant, and there is upside potential in it.

My strategy with this is to incrementally ease into the market because…I don’t know. I think I’m favoring this as a bear market rally scenario still and there could be more volatility later in the year but, of course, I don’t know that. That could be wrong. And rather than just sit here and wait for something that doesn’t happen, that is another fall, and then risk missing out on potential upside if the market continues to rally, my approach here is to incrementally ease in back into the market through an ETF. I’d rather do that than buy individual stocks at this stage because I’m not getting the buy signals for the individual stocks yet. It takes time for these stocks to turn around, for their moving averages to swing positive again. And the plan being that I can start with an ETF where I think the risk is relatively lower and then transition into the stocks as the opportunities come about.

Please see video for more detailed 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.