ASX Shares Near Breaking Point | Episode 68

By Jason McIntosh | Published 16 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

00:33 What the latest volatility means for ASX shares

02:15 How I’m positioning my portfolio (it may surprise you)

02:52 Watch this key support level (plus the risk if it breaks)

04:28 This sector of the market looks encouraging

07:13 Big developments in gold (must watch for gold bulls)

Transcript (abridged)

Please note: Charts available from video

So, we’ve got the ASX 200 up on the screen. And this has really been a whipsawing two weeks with the ASX 200 moving 4.5% thereabouts in either direction. And the initial rally was really interesting. So, this initial rally that we had off the September low was looking quite encouraging. It was shaping up nicely and it presented the possibility for the market then to track sideways, form a bit more of a base and consolidate, and then have a go at testing this big resistance band between 7100 and 7200. But, of course, that’s not what we got. Rather than some consolidation, we got a swift move lower when that U.S. inflation data came out. And the market really has, in the last few days, erased all of those gains that had been put in place.

And the volatility that we’re seeing, it really highlights the need for caution in this current environment. And with the ASX 200 now back down here beneath these moving averages…so I’ve got the 50 and the 100-day moving averages overlaying the chart. With price now below those moving averages, they’re now in that position of vulnerability. So, I think we need to be prepared for downside surprises. It doesn’t mean they’re going to happen, but we do need to be prepared for that possibility because that’s when that stuff typically happens when the market is below moving averages.

For me, what that means is that I have no leverage in my portfolio and I have a high cast position. Still got exposure to the market because we don’t know that the decline is imminent, and we just don’t know. So, it’s about managing risk and managing possibilities. So, do have exposure to the market in the event that a rally surprises people, but should the market roll over, the damage it does to my portfolio, it is going going to be managed. It’s going to be less severe than someone who’s going all-in.

So, let’s jump over to a four-hourly chart and just look at a little bit more detail. So, what we can do on this, just finding some support that the market may be able to hinge off it currently. And if we just run that across, we see we’ve got a support around…comes in around 6700. So, that picks up some activity through here in June, picks up the high in July, the low in September. Now here we are. So, it’s a bit of a key point for what I think happens in the market over the next…well, it probably sets the core, sets the tone for the weeks ahead, and the market hold here and bounce, or do we get a break and a probable retest of this June low?

Let’s go back over to the daily chart. And I think with the ASX 200, as I was saying, it really needs to hold its ground around this support. And, of course, the risk here is that we do get a break and the market does start to roll over and reengage this sell cycle that we hadn’t placed during the…what’s this from? From the April high. We don’t want that sell cycle re-engaging because then it does open the possibility of new lows and looking towards 6200.

On the positive side, it’s been interesting to have a look at the small caps. So, let’s just jump over to them now. So, this is ASX small caps or small ordinaries index. And what’s been positive here is that it’s been holding up relatively well. So, if you look at the strength and the size of the advance and then you look at the pullback, and the pullback at this point at least looks corrective, it looks a corrective pullback to this strong rally that we had. And you can put some Fibonaccis on that. And when you put the Fibonacci retracements on, it’s only pulled back about 50% of the rally. So, you look at that in isolation you say, “This chart still looks encouraging.” Of course, you can’t look at it completely in isolation because it’s going to be heavily influenced by other things that are going on, but it is a slight positive to see that performing reasonably well.

But like the ASX 200 and the U.S. markets generally, we’re below the moving averages. The 150-day moving averages price is below there. So, I believe that does increase downside risk whilst the price action is in this sector of the chart. I think the play here is to give relatively strong stocks a benefit of the doubt. So, that’s what I’ve done with my portfolio. I’ve got stocks which are performing reasonably well to quite well with some of them. Some stocks are actually doing well in this environment and this time. They’re the stocks I’m holding onto, but at the same time, I’m quick to exit stocks that are trending lower and hitting my exit points. So, I’m not holding on to things hoping things to get a better bounce to get out. I’m pretty quick to cut things at the moment.

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Let’s finish up with a quick look on gold because there’s been things on the move in gold this week. So, here’s a gold chart. And now, gold is trading…now it’s right down on this key support zone at around 1680. It is testing right there as I’m filming. By the time you watch this, maybe it’s bounced, maybe it’s fallen through. But nonetheless, this is a really important level. It’s been a key support for gold for around two and a half years now. So, it goes all the way back to around February, March 2020. Now, we had a test of this support in July and we got a strong rebound off there. But what we’ve had now is that that rally failed and gold has now fallen right back down to this support. And got to say it looks vulnerable. It looks so vulnerable here. We’re below the moving averages. Again I’ve got the 100 and the 50-day moving averages. Prices are below it. We’ve had a sharp decline over the last couple of days. It really does look like we’re going to test the other side of this support and see what happens.

And it could be…I think a break here you’ve got to say is going to be negative for gold. I don’t think now is the time to buy some gold. I think it’s the time to…if you’ve got gold, well, you’ve got to think what position it’s playing in your portfolio and how you want to manage it. We’ve been in this big trading range since the 2020 high. It’s a big range, which gold has been bounded in, and now it looks like we might be breaking out of that range to the downside. My view had been through here that we’re actually getting ready, forming a base to break to the top side, but this is a thing with markets. Markets don’t do what we think they’re going to do or what we want they’re going to do. We’ve got to analyze the price action and we’ve got to adjust our views rather than waiting for the market to adopt what we think. It works the other way around.

So, let’s go to the weekly chart on this. It gives a different perspective. Now, my view had been this was a big up trend. This was a sideways consolidation, and then from there, you get a rally. But you can’t argue with the price action. The price action is what it is, and at the moment, that’s potentially a big negative. Now, I wanted to point out some key areas from previous years just to give you an idea of what can happen when gold breaks out of a range. So, what I’ve done here, I’ve found a couple of areas which are similar to now. So, the first one is back here in 2011. You can see gold had a big rally. It had gone sideways for…I think that was around 12 months. Had a big support base. Once that support broke, that set the stage or set the momentum in action for gold for the next several years really. Gold went into a significant decline.

Then again during this period here, we had…This is the opposite situation where gold was now starting to recover. Went into a big sideways range over a couple of years. The resistance band was at the top. Once gold broke above that resistance, it had a significant rally and that set the momentum for the next year or so. Now here we are. What’s going to happen? I don’t know. I don’t know which way this is going to go. It may not follow the analog from these previous times either. It could be a false break below and come back up, but I don’t want to be betting on that should we get the breakdown. We just got to be aware. We’ve got to be aware that when these levels break, they can lead to unpleasant things for people who want to own gold. So, let’s just wait and see, but be aware, be cautious, and I think watch this space closely.

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.