Don’t Buy ASX Shares Yet | Episode 72

By Jason McIntosh | Published 30 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

00:31 A quiet week for ASX shares. But don’t relax, yet.

01:50 Could a double bottom form in the ASX 200?

03:28 Surveying the damage in the ASX Small Ordinaries

03:48 My playbook for the correction (and what you can do yourself)

06:08 Big breakdowns in these key markets

Transcript

Please note: Charts available from video

Let’s start with a chart of the ASX 200. This week we’re really seeing the ASX 200 stabilised after last Friday’s sharp fall. But I think despite this relatively narrow range over the last week, the ASX 200 remains vulnerable. There’s nothing on this chart that is pointing to an imminent low being put in place. That’s not to say the market can’t bottom around here, but the path of least resistance remains to the downside.

We’ve got a sequence of lower highs and lower lows. So, you just see that all the highs have been falling. The lows have been falling as well. So, a sequence of lower highs and lower lows, so that’s negative. And then the price is also currently below these moving averages. We’ve got the 50 and the 100-day moving averages which are trending lower. So, I think we need to work on the basis that the sell cycle that has been in place for some time now remains in place.

I think an interesting question is whether a double bottom could form around 6400. So just looking at the June low and the low from earlier in this week, and it does have that potential. You could get a double bottom forming around current levels. The ASX 200, it’s already tested below the June low. It’s just been slightly below the June low earlier this week, and then it’s rebounded. It wasn’t able to sustain below there so far. But I think the real test will be what happens if we get a retest of this week’s low over the next few days. I think the risk is that a retest opens the window to further selling.

So, that’s what we need to be aware of over the next week. Yes, a double bottom is a possibility, but it shouldn’t be our base case. I think we need to respect the prevailing downward momentum that is in place, and I think we need to stay defensive because we just can’t rule out a continued sell-off down towards 6,200.

I want to go over and have a quick look at the ASX Small Ordinaries. And it’s much the same story in that the sell-off over the last two weeks has caused a lot of technical damage, and I think it’s going to take time to repair this damage. But if you’ve been following the price action and following the videos that I’m putting out and what we’re talking about, you’re probably already mostly in cash. And that’s how I’ve been positioned for much of this year. And I took on some ETF exposure during this rally during July and August, and I did that in the event that it turned into something bigger and was a part of a larger recovery sequence. But when the support gave way, we had support coming in on the Small Ords around 2,800. I was using the S&P 500 as my key reference point. As support broke, it was a case of winding those positions back. I want to be long at the right time. I don’t want to be long and hoping for a rebound. I want to be long when momentum is at my back. And that’s currently not the case.

At this point, I really do think it’s now a case of cash being king. I will consider individual stocks with positive momentum, and I’ve still got some stocks like that in my portfolio, but I’m not interested in trying to pick lows in either falling stocks or falling indices. I think there’s just too much risk in doing that, especially in this environment where there’s just so much uncertainty. Yes, you can be the hero, but you can also get run over by the steam roller. And if getting run over by that steam roller is not an option, I’d suggest it’s a case of playing it safe until we get a positive lead from the price action. And that’s just not at the moment.

Now I want to finish up by having a look at the European markets. And I think we’ll start with the UK because there’s been some really important technical developments over the past week. So, just looking at the UK. This is the UK FTSE 100 index, and it’s just broken down from this large triangular pattern. And it actually looks a lot like a large topping formation. It had started falling back here in February. And you can get a measured move out of these patterns. You measure the width of the pattern and then you project that down from the breakdown point. And when you do that, you get a target around where this blue square is, which is currently about 8.5% below where the market closed on Thursday in the UK. Now, we can also see the moving averages have turned lower. The 50-day moving average is falling quicker than the 100-day moving average, and price is currently below the moving averages. So, this is a particularly vulnerable point for the UK market.

The UK stocks. I’ll just put this onto an hourly chart for a moment to get a little bit more detail. Got a strong bounce when the BoE, when the Bank of England came out and announced they were going to be buying bonds to support the bond market, but then that just quickly peeled away and we’re now back testing the lows. And it’s also notable that there’s a lot of overhead resistance above the market. So, I think we’re going to need to see prices rally back above this breakdown point to even just put a…to take on a neutral outlook. At the moment, I think it’s just outright bearishness, but to get a neutral outlook would have to get back above this breakdown point around 7150-ish.

And this breakdown theme, it’s really playing out across Europe. So, just going and having a look at the EURO STOXX 50 index, which is a collection of 50 of the largest stocks across Europe. And we spoke about this last week. Last week I was talking about this key support level for European stocks, and now we’ve got the breakdown. And this was a key support at 3,400. It had held that support since March. And while that support was in place, there was always a possibility that this was going to be a basing pattern and the market may turn higher. But that hasn’t been the case. It’s broken down. So, that keeps this larger sell sequence very much intact.

I think the risk in Europe remains to the downside. This is definitely a market where the risk is that this market continues to peel away. Maybe this pivot by the Bank of England is going to make some difference, but the way the price action is responding, it suggests that it’s not at this point. I think it’s going to take a rally back towards 3,500 to neutralise this sell cycle.

So, that’s the situation at the moment. It’s still all about playing defense. At the risk of sounding like a broken record, it’s defence at the moment. I’d love to say there’s great opportunities out there. There’s bits and pieces, there’s some stocks which are continuing to buck the trend but they’re few and far between. At the moment, it’s about protect your capital. Make sure you come out the other side because there will be opportunities. It’s about being ready. When those opportunities come, you grab them and run with them.

Please see video for more details analysis and charts

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