ASX Shares in THIS Sector Look Set to Rally | Episode 66

By Jason McIntosh | Published 9 September 2022

Trade the Trend is a weekly video focusing on where the stock market is going. It’s for investors and traders looking for technical analysis of the ASX shares, the ASX200, the SP500, as well as stock markets and commodities markets in general. 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

00:25 ASX 200 has a positive week (but will it continue)

03:02 Two scenarios you need to be ready for

06:28 This is one of my favourite plays right now

07:58 Don’t overlook this positive risk/reward set-up

10:54 This bombed out former market just gave a buy signal

Transcript (abridged)

Please note: Charts available from video

Let’s start with the ASX 200. And this has really been a pretty positive week in that the market tried to break lower early in the week, and then it’s rebounded strongly to be finishing Friday afternoon just after the close at a higher level than where it started the week. And that’s really what we want to see. We want to see buyers actively coming in and buying these dips. So, what I want to do, I want to go over to the four-hourly chart just to get a little bit more detail on the price action. And it’s interesting when you do this because you get to see last week’s price action in a bit more detail.

So, what we saw happen last week was prices break down from this little range, congestion range, consolidation range that had formed over…that probably formed over about a week. So, we had the breakdown, prices broke down from there. If things were going to start to spiral out of control, well, that was one of those points where that spiral could have gone, but that’s not what happened. The dip was well and truly bought, and we’ve had a strong rally back retracing all of the losses.

And what we can also do, we can also put on a Fibonacci retracement of the rally. Here is where you draw these Fibonaccis. I’m counting this as an impulsive wave. When you do it this way, we’ve dipped down beneath the bottom of the Fibonacci range. I’ve seen other people using the low from June do their Fibonacci retracements. When you do that, it’s come pretty much spot on. So, there’s always discretion on how you apply the Fibonaccis, but whichever way you measure it. It’s about as far back as you want a retracement to come whilst keeping some bullish potential on the table. So, it’s really rebounded right at the right time from where the Fibonacci band is.

So, just removing that from the chart and going back to the daily to see where we are now. Let me just take those little green bits off as well. And so the key now is, how is this rally going to develop? And are we going to see a strong move upwards or we’re just going to trend along sideways? And it’s a similar scenario to the S&P 500 with what’s been going on there.

The risk is that we only get a shallow retracement that the market can’t really get too much further, and then it stalls, and it just starts tracking sideways for several weeks. And then from there, we get the market starting to roll over again and breaking down below the June low. That’s the case to watch out for. That’s the price action to be aware of if we don’t get much of a bounce off this low. That then opens up that window for more declines. And understanding that helps position your portfolio because you know what is potentially shaping up as negative and what could be positive.

On the other hand, if the market can retrace and claw back a big chunk of this selloff that we saw through August and quickly find itself up just beneath this big resistance band between 7100 and 7200, well, then that’s another story altogether because then we got this impulsive wave to the upside. If the market would tend to go sideways from that position, from a position of strength, it opens the window to be able to punch through that resistance and test upwards.

This is where price action can really help understanding what the price action is showing you. At the moment, we need more information, but there are positive signs that the market is going to attempt to test higher. We just need to see how that test starts to unfold. And I think…my take on this, with the market showing some strength in the second half of the week, some strength we’re seeing in the U.S. market as well, I think the play here is to go with this emerging strength, seeing whether it follows through from the strength we saw during August.

And as I’ve been saying for a while now, I think it’s all about incrementally getting some exposure to this market because we just don’t know. We don’t know whether this is just a bear market rally which is going to roll over, whether it’s part of a multi-month topping pattern which is going to continue to play out, or whether it’s the start of something new. We just don’t know.

There’s lots of uncertainty out there still. What I’m trying to do is really I’m just trying to manage risk. I don’t want to be getting too exposed if this does turn out to be nothing too exciting and the market does have further to fall. But that said, I want to at least get a foothold in this market. I want to get a foothold of exposure in case the market does surprise people and it does rally. It would surprise people. The macro backdrop I know is awful and it’s hard to see what could drive a rally, but markets do things that surprise most of the people a lot of the time. So, that’s why I say open-minded. Let’s see how this unfolds.

And one of the plays I do like for getting exposure to the market is the small ordinaries, the ASX Small Ordinaries. The pullback so far from the August high, it’s been quite orderly and it looks rather constructive. And so small caps have held onto most of the gains from this low point back in June. And we put the Fibonaccis on that and you see it’s come back just below the 50% retracement, which is an encouraging sign. That’s what you’d expect to see if you had a market gearing up for further gains. And I think the ASX Small Ords, I think it’s got more recovery potential than the ASX 200. And, of course, one of the reasons for that is this sold off a whole lot more during the decline.

Another play that I like that I think has potential is the ASX tech sector. So, this is the Technology Index on the screen now. And what we’ve seen, just like the Small Ords, the pullback has been quite orderly. We’ve had this strong rally off the low and a very orderly and constructive pullback, well, at least so far. It’s held onto well and truly most of its gains. Looking at the Fibonacci retracements on this, and you can see it’s only come back to the 38.2% retracement. So, that’s quite constructive when we look at this. And I think you can look at the Technology Index as a higher beta version of the broader market. Same correlations but the swings tend to be much larger in both directions.

So, I’m thinking if we do get a general uplift in equities, this is one of the indices or sectors which could do quite well. And just looking at where this rally could go to. If a rally develops, this becomes a target area, the resistance between around 2000, it’s around 2500. So, when you measure that out, that’s about 15% to 20% above where the market currently is. That’s why I say there’s some quite decent upside potential in even just a rebound play. It doesn’t even need to be a new bull market. And it’s that incremental approach… get the toe back in the water, and if it does continue to go, you’ve got the base which then can be built upon if it continues to rally. And I think the risk at the moment is manageable because you can be exiting positions within 5% of where the current price is if this fails and continues gain steam to the downside.

And one of the things which has been really interesting this week is that I’ve been seeing…and this all adds to this potential idea around this potential for a broader rally in stocks. What’s been interesting is I’ve been seeing quite a few buy signals turning up through my algorithmic scans over the last couple of weeks. There’s been a lot of activity in the lithium stocks, coal stocks. The uranium stocks have been triggering signals. There’s also been a few tech and retail names, so stocks within this tech index. A few of those have been triggering the buy signals.

But what’s been really interesting is one stock, in particular. I just want to quickly tell you about now. It’s one of these stocks. It went from being one of the best-performing stocks to one of the worst-performing stocks over the space of a couple of years. The company’s name is A2 Milk. So, this is it on a weekly chart. Let me just go onto a daily chart. And let me tell you the story which has been developing. So, this has been fascinating all through this decline. There were all these calls to buy the stock. People would say such a well-managed company is going to turn around, got to buy it. But you don’t fight the trend. At least I don’t fight the trend, and I suggest you don’t fight the trend either. When a market is below these moving averages, it’s the time to stand aside, let the market do what the market is going to do, and you can come and pick up the pieces afterwards once you see signs of positive momentum. A2 Milk spent a lot of time during ’21 and ’22 going sideways. Again lots of calls. This is base-forming. Got to buy. It’s going to turn back up. We didn’t get the turn-up and the moving averages.

So, from that standpoint, my Motion Trader service hasn’t given a buy signal on a2 Milk through this period here because the moving averages were still negative. But now here we are today. Got these moving averages crossing over about a week ago, which triggered the buy signal along with some other indicators which go into the Motion Trader buy signals. Also, interesting when you go across and you have a look at the volume. I put a volume profile on this. And this strong rise we saw was accompanied by a surge in volume. So, you wonder, what’s going on? What’s driving that? And as a technical trader and investor, it doesn’t particularly bother me. It’s just interesting to see that, and it’s a good thing because you know that people are buying this with vigour. They want to buy this company at this level for some reason. I don’t care what the reason is but the probability, from my perspective, is that the share price goes higher and it could go a lot higher. Who knows where it goes? Could also fizzle out and do nothing, but it’s one of those setups where you start to get really positive risk reward.

And that’s what this game is all about. It’s about making sure your risk is managed whilst your reward is potentially significant. And you play that setup day in day out, week in week out, year in year out, and that’s how you can potentially do very well in the stock market over time. So, interesting one to watch, how this all plays out. If you’re interested in the other stocks which have been triggering signals, maybe duck over to Motion Trader, take out that two-week free trial and have a look at the stuff that we do, the stocks that we find amongst the ASX 2000 or so odd listings. It’s going to be an interesting week. Let’s see how this rebound develops. Is it going to be a dead cat bounce, or is it going to have some punch to it and start to set up something more positive? It’s going to be very interesting.

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.