Big Losses For SP500 Bears | Key Pattern | Episode 121

By Jason McIntosh | Published 31 March 2023

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 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 Heading?

00:00 Intro

00:30 This is a surprise to many SP500 investors

02:03 Can you spot this classic chart pattern?

04:38 Watch for this scenario in SP500 (and don’t do this)

07:53 This popular strategy has been a disaster

09:51 Watch this key ETF (it’s giving an important clue)


Please note: Charts available from video

This video is going to focus on the S&P 500. I’m going to cover the ASX 200, gold, and uranium in a separate video (click here to watch). I’m also going to have a look at one of the weak points in the market that you need to be aware of, so make sure you stick around for that. As always, this is general commentary. It doesn’t take your personal situation into account. With all of that said, let’s get into our first chart.

So, we’ve got the S&P 500 on the screen. And there really has been quite a bit going on over the last week. And I think there’s probably really also a few surprises in that. I think for many people, they’ll be surprised that the market is actually trading up from where it was a week ago. And it’s so interesting when you think about the bank collapses that we’ve seen. We’ve had a rate hike and the market’s up. So, I think the point to take from this is what often seems obvious to people is often not what happens. So, this is why I always say we want to follow the price action, not the headlines. It’s the price action which is the key to making money and doing well in these markets over time.

Now the dominant feature on this chart is this range. Now if you watched last week, you’ll know that I drew this range then. And what I’ve done with this range is I’ve used parallel lines. You can see these two blue parallel lines. And different ways to draw ranges. You can draw rectangular ranges, contracting ranges. But this one which I think works nicely, which fits the parameters of this range quite well is this downward-sloping parallel end-line range. And the big question now is, can this range break to the top side? So, I’m going to talk a little bit more about that in a minute.

But first of all, let’s just go over to the four-hourly chart, because this is also really interesting. Looking at the four-hourly chart, it really is fascinating I think to just examine the price action over these last couple of weeks, so last few weeks. And what we had, I was talking about this a couple of weeks back, we had these this series of spikes to the downside, and it seemed to me like it was an attempt from the bears to really break the market down, to hit stop losses, to get follow-through selling and get that big decline which a lot of people have been speculating about for some time now. What was interesting is each attempt to break the market down was followed by a quick rally back up. And that continued over the last week.

You can see around on the 23rd of March we had the… So, of course, that was all during the bank collapses, that period around the 13th of March. We were in the middle of March, and then towards the end of March, we had the rate hike and the accompanying Fed commentary around that, more negativity came in, another attempt to sell the market off. But of course, we’ve got the rally. Now, if you’ve got a good chart, you might have already seen this pattern, but we’ve actually got a head and shoulders, an inverse head and shoulders pattern where you’ve got the shoulder in late February, the head in mid-March, and then you got the right shoulder in late March.

And I just want to bring this up because it really is a textbook head and shoulders in terms of the market sentiment. And this is interesting because the sentiment is so recent so you’ll be able to relate with it. And so the sentiment during this right shoulder period, this is when the Fed hiked rates, there was commentary from Powell and Yellen. Markets started getting negative on the back of the bank collapses, and there was fear that the market was going to roll over again. That’s a typical personality of the right shoulder. And when you don’t get the follow-through selling, you get the short covering. And maybe this is behind a lot of this rally we’ve seen over the last or during the last week. We’ve seen short covering going on where the bears just go, “It’s not working.” They’ve got a cover. So, very interesting to see how this has been playing out.

Now let’s go back to the daily chart. And it looks to me that I think with where we are currently positioned with the strength we’ve seen over the last week, it looks like there’s further upside potential towards the top of the range. I think it’s a case of holding onto long positions that are working and then exiting stocks which are languishing or breaking down. The question of whether we want to add to long positions at current levels, well, I think that’s another matter altogether. The problem I have with adding to positions at this current point is that it’s just not an asymmetric entry point. This is only 2% from the top of this trading range. And so when you buy towards the top of a range, you open the possibility that the market doesn’t break higher and indeed falls back.

Now there’s a couple of ways this could go, and there’s probably even more ways as well, but two possibilities are that the market does rally up towards the top of the range over the next few sessions. Maybe it then pauses near the top and then punches through. So, that’s probably the most positive scenario that we currently have on the table. But the alternative for that, and this is the risk of adding to positions at current levels, is that we do get a rally towards the top of the range but then we get a reversal and we start to come back down and maybe back towards the middle of the range retesting support. So, buying near the top of a range, it brings that risk that you get the pullback, you don’t get the breakthrough. So, I’d rather wait for the breakthrough or the breakout at this point in time rather than preempting it. Because preempting breakouts, often you’re left with a position you wish you didn’t have.

And there’s also some structural resistance up around where we are now. So, let’s just draw that in. Just matches up with some of these points. It’s around 4200. And you can see we’ve had…probably just lower that a touch here. We’ve had plenty of activity around here over the last several months. So, you’d expect with this range resistance, 4200 structural resistance. There’s plenty of reasons I think to just want to wait and see can the market punch through before adding to positions? But with this range we have in place now, you can visually see why this has been such a difficult nine-month period since May last year, so even a bit longer. It’s been difficult because it’s just been so much back and forth. There’s been no sustained momentum in either direction. A lot of negative sentiment but there hasn’t been a lot of net movement. So, we’ve been in a situation where the bulls aren’t winning, the bears aren’t winning. All the people who’ve been talking about a crash, that hasn’t played out. People trying to buy the dip, that hasn’t worked. Momentum, which is what I do, that hasn’t worked. It’s been most people have been losing.

And it’s interesting I was just looking at some of those inverse ETFs, the bear in ETFs recently. And take S QQQ, for instance, which is the leveraged bear market ETF for the NASDAQ, and just look at what a disaster this has been. So, this rally is when the market’s falling. So, even just taking the last couple of months, just this period here. Just expanding this out. So, people who are just playing the crash scenario this year are currently losing money. Look where the S QQQ is trading now. And it hasn’t been working. People who are trying to play the crash through the inverse ETFs, it’s been a disaster. That’s why ranges are just such a difficult period for all concerned. I think the play here is still being cautiously long. And I think that’s been the play since we had this key reversal back in October, which if you’ve been watching for a while, you’d remember I spoke about. It’s been the play and it continues to be the play. We’ve got key support at 3900 which has been holding. Below that, it’s 3800 being a key level being the December low. Whilst they’re in place, I think the players need to cautiously take the upside.

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Now let’s jump over to something else. I want to show you one of the cautionary flags in this market, and it’s the S&P 500 equal-weight ETF. So, of course, the S&P 500 is market cap based. Equal-weight is a bigger stock, and the smaller stock has the same influence on the price action. And why this is a cautionary flag for me is that it does suggest an internal weakening within the S&P 500. And we’ve also got lots of technical damage just over the last few weeks with the bank collapse, the sell-off, and regional banks generally. And also we’ve got this big trading range which the market is in and we’re really now right back in the middle of that trading range. And we’re also below the moving averages. So, that does damage the technical picture quite a bit really I think.

And there is this scope. I think we have scope to get some sort of a rebound maybe over the next week or two. We’re already getting a rebound. So, we were stretched below these moving averages. We’re getting that rebound. I think what’s important is just to watch how this rebound develops from where we currently are. Will it end up looking like a bit of a V-shape where we continue to get a strong move up then we get some sort of a pause and then another rally? And then that starts potentially looking encouraging. You start getting the platform, you start getting an overall base, and then possible break higher.

But on the other hand, if this rally does start to stall around here, we end up with choppy sideways price action. It then opens a possibility for another push lower. So, this is the cautionary flag to the market. We need to see how this plays out. And it’s hard to see a whole lot of upside in the near term in the S&P 500 while we do have the equal-weighted index flagging. We really want to see the market breadth coming through and the market moving as a whole not just a few large caps dragging it higher.

And just briefly looking at the Russell 2000, the small caps. It’s the same situation. Big range. We’re towards the bottom end of the range. It’s hard to get super confident about a market when you don’t have that broad participation.

And then also breaking it down further, looking at an iShares Micro-Cap ETF. This made a new low just this week. So, again, I like to see the market moving in sync. I don’t like seeing NASDAQ 100 is looking good but then you’ve got other spots which just aren’t lifting their weight. So, that’s a caution for the market generally I think.

So, I think that ranges are just…as we’ve got at the moment, ranges are just such a battlefield and not just financially. Financially, they’re difficult because they chop and you get whipsaw and you get in and out of positions, but also emotionally. They take an emotional toll. But I think the big thing to remember is that these trading ranges, they do end and trends do return. We just need to ride them out. We need to be cautious, we need to protect our capital whilst they’re in place. And I think your advantage as a private investor is that you can choose when to play. The guys at hedge funds and investment banks, I know I’ve been there, you can’t sit it out for six months and be super selective in what you do. You’ve got to make things happen. Private investor, you’ve got the luxury of being able to wait for the right opportunity to present. Only swing when the setup looks good. You don’t need to play at everything.

So, my preference, as I’ve been saying, remain conservatively long. But it’s just not a time for big bets. We just don’t know how long these ranges are going to last, but remember they will end. And I think typically when a range ends, you get a big multi-month move, particularly out of these large ranges we’re currently in. So, the setup is being created. We just got to wait for the time to play it.

So, hopefully, that’s been interesting. Hopefully, it’s been good to… It’s been good talking to you, and I look forward to coming back and having a chat to you next week. Until then, bye for now.

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.